As the government implements a "credit pardon" for 3.24 million people, forecasts in the financial sector suggest that credit inflation will intensify and the lending threshold will rise further. From the perspective of financial companies, the bulk increase in credit scores makes it difficult to trust the credit assessment system, and they will inevitably have to make their evaluations stricter to reduce the risk of insolvency.
According to the financial sector on the 12th, the Financial Services Commission will implement support measures for credit recovery that restrict the sharing and utilization of delinquency history for diligent repayment debtors starting on the 30th of next month. The target beneficiaries are 3.24 million individuals and sole proprietors who have incurred arrears of 50 million won or less from January 2020 to this month.
This is the largest scale ever. In 1999, the Kim Dae-jung government erased the arrears records of about 400,000 people during the foreign exchange crisis, and in 2013, the Park Geun-hye government conducted a credit pardon for 100,000 people. The number of beneficiaries has sharply increased since the COVID-19 pandemic, reaching 2.5 million under the Moon Jae-in government in 2021, and erasing records for 2.9 million under the Yoon Suk-yeol government.
The problem with the credit pardon is that it accelerates credit inflation. Once the delinquency history information is completely erased, credit scores will rise; for example, during the pardon of 2.9 million people last year, personal credit scores rose by an average of 31 points. As credit scores continue to standardize upward, financial institutions have no choice but to strengthen their lending criteria. A banking official said, "Previously, a score of 500-600 out of a maximum of 1,000 was considered in the medium credit range, but now it must be in the 700-800 range," and noted, "Artificial adjustments such as credit pardons increase distrust in the credit assessment system and reduce its discriminative power."
The increased lending threshold due to household loan regulations is expected to rise further. Currently, it is difficult to obtain a loan without a credit score of at least 942 (based on KCB standards). According to the Banking Association, the average credit score of borrowers who received household loans (based on new transactions) from the five major commercial banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup, in June was 944.2, marking an all-time high.
Kim Sang-bong, a professor of economics at Hanseong University, said, "The credit pardon can shake the foundations of the credit assessment system," adding, "Banks, which find it challenging to select borrowers, may raise loan interest rates, leading to a preference for borrowers with higher credit ratings and collateral-based lending as a side effect."