The amount of subrogation over the past 3 years for the special guarantee for lowest-credit borrowers — which President Lee Jae-myung criticized as "too cruel" for applying an annual interest rate of 15.9% — has exceeded 200 billion won, according to tallies. Subrogation means the government repays in place of a financial consumer who received a policy loan and failed to pay it back.
As default rates on policy finance products for low-income people rise rapidly, the money spent on subrogation keeps increasing, and if loan rates are lowered as the president requested, the funding burden is expected to grow further. The financial sector warns it could become "a bottomless jar."
According to data from the Korea Inclusive Finance Agency (KINFA) obtained by ChosunBiz through the office of Rep. Kim Sang-hoon of the People Power Party on the National Policy Committee on the 18th, the cumulative subrogation amount for the special guarantee for lowest-credit borrowers totaled 207.63 billion won as of the end of July this year. Subrogation began in Dec. 2022, three months after the product's launch in Sept. 2022, and KINFA repaid banks on behalf of borrowers 56.92 billion won in 2023, 99.9 billion won last year, and 50.8 billion won through July this year.
The subrogation rate was 26.5% as of July. For example, if a financial consumer borrowed 10 million won from a bank that has an agreement with KINFA, it means KINFA covered 2.65 million won that the borrower could not repay. The subrogation rate jumped 1.8 times (12 percentage points) in one year, from 14.5% at the end of 2023. When drawing up this year's budget, KINFA raised the expected subrogation rate for the special guarantee for lowest-credit borrowers to 53.6%. In other words, it expects to recover only about half of the money lent.
The special guarantee for lowest-credit borrowers is a policy finance product for low-income people that lends up to 10 million won to lowest-credit borrowers who are in the bottom 10% of credit scores and have annual income of 45 million won or less. Unlike Sunshine Loan, which is available only when there is no history of arrears, borrowing is possible even with a history of arrears.
A similar product is the illegal private finance prevention loan, and the situation is even more serious. Over two years since its launch in May 2023, arrears have exceeded 80 billion won. Considering that the maximum loan limit for this product is 1 million won, the size of arrears is considerable. As of 7th, the subrogation rate for this product was 35.6%, the highest among policy finance products for low-income people. The subrogation rate for Sunshine Loan 15 was 25.4%.
In this situation, if loan rates are lowered as well, the funding burden is expected to increase. As more money must be used to repay debt, supply of new products is being reduced, and cutting loan rates would require more budget. Of the annual loan rate of 15.9%, the portion that includes banks' funding costs and operating expenses is not easy to adjust. In the end, the guarantee fee rate that KINFA takes (8.9% for banks, 7.9% for savings banks) would have to be reduced, but a significant portion of the guarantee fee is also used for subrogation, making rate adjustments impossible without additional funding. Financial authorities and KINFA are exploring ways to raise resources from financial firms by increasing contribution rates or creating a Inclusive Finance Stability Fund.
Rep. Kim Sang-hoon said, "A considerable number of policy finance products for low-income people are deficit loans filled with taxpayers' money, and there is concern they could become a bottomless jar," adding, "Protecting vulnerable borrowers is necessary, but approaching it from a welfare standpoint to lower loan rates can not only increase expenses but also lead to market failure, and moral hazard could grow."