Emergency loans for the lowest credit groups under special guarantees amounting to over 100 billion won have been executed in just four months this year. Recently, as private financial companies have tightened their lending, the urgent need for cash among those with the lowest credit ratings has shifted toward this product. With demand for special guarantees continuously increasing, it is expected that over 100 billion won of government budget will be allocated next year to cover loan losses due to repeated difficult situations in recovering loans. Given that the budget allocated for special guarantees is essentially money that cannot be recouped, there are calls for measures to prevent budget waste.
According to the Financial Services Commission on the 12th, the new guarantee amount for special loans for the lowest credit groups was 107 billion won by April this year. During this period, the number of new guarantee cases reached 30,638. Considering that last year's new guarantee amount was 193.5 billion won, more than half of last year's performance has been executed in just four months this year. At the current pace, it is projected that over 300 billion won will be supplied for the lowest credit group special guarantees this year. The special guarantee for the lowest credit groups is a policy loan product aimed at individuals in the bottom 10% of credit scores with an annual income of 45 million won or less. The government guarantees the full amount of the loan, providing a lifeline for those with the lowest credit scores.
The recent increase in demand for special guarantees for the lowest credit group is a result of the raised lending thresholds in the financial sector. Banks are handling household loans with strict management due to the increase in lending, while second-tier financial sectors such as savings banks and mutual finance are tightening criteria for credit loans citing soundness management. Financial institutions have started to clamp down on loans for low-credit borrowers, leading those with the lowest credit ratings to seek special guarantees to urgently borrow money even under government guarantees.
The government budget allocated for the special guarantee program has also been increasing annually. The problem is that this money is used to pay off the debts of those with the lowest credit ratings. The budget, initially allocated at 28 billion won in 2023, has increased to 56 billion won last year and 92.5 billion won this year, including the supplemental budget proposal. The variable that influences the budget size is the expected business loss rate. The expected business loss rate is a figure that excludes claims recovery and guarantee fee income from the substitution compensation rate. If the borrower (the person borrowing money) does not repay the loan received under the special guarantee, the government has to pay back the money, which is termed substitution compensation. The process in which the government demands repayment from the debtor after paying back the money is called claim recovery.
The basic resources for special guarantees come from the funds of each financial institution. The expected business loss rate is the ratio of the total loan amount that remains unpaid, which ultimately determines the government budget. If the expected business loss rate increases, the money used by the government due to uncollectible loans increases, resulting in a budget increase. The Financial Services Commission raised the expected business loss rate from 20.6% last year to 33.0% this year. Although the target supply amount for special guarantees for the two years is the same at 280 billion won, the substitution compensation rate increased from 40.0% last year to 53.5% this year. If next year's target guarantee amount and expected business loss rate both increase, the government budget to cover loan losses will exceed 100 billion won. Although a budget of 100 billion won is allocated in the name of support for vulnerable groups, in reality, it is dispersed like cash support to those with the lowest credit.
Experts recognize the necessity for financial support for the lowest credit groups but also advise that measures to reduce budget waste must be devised simultaneously. Choi Cheol, a professor of consumer economics at Sookmyung Women's University, said, "Special guarantees for the lowest credit groups are unquestionably a loan product, so repayment of the debt must be a prerequisite," and added, "Vulnerable groups that have no capacity to repay the loan should receive other welfare benefits instead of special guarantees under the judgment of policy financial institutions." Professor Choi emphasized, "Additionally, policy financial institutions must inform borrowers of the importance of repaying debts and eliminate the moral hazard of thinking, 'policy loans are money that does not need to be repaid.'"