The government appears set to expand next year's supply of policy-based inclusive finance products for the lowest-credit borrowers by about 1.1 trillion won. It plans to cut 1 trillion won from living-stabilization funds that had supported low-credit, low-income people to concentrate support on the lowest-credit group, but critics say this could cause low-credit borrowers to lose chances to recover and be pushed outside the formal financial system.
According to materials that the Korea Inclusive Finance Agency (KINFA) submitted on the 25th to the office of People Power Party lawmaker Kim Sang-hun, a member of the National Policy Committee, next year's target supply for the "Sunshine Loan special guarantee" (integration of Sunshine Loan 15 and the special guarantee for the lowest-credit borrowers) is 2.33 trillion won. This is an increase of 1.11 trillion won compared with this year's aggregates of the target supply for each product (1.22 trillion won). In contrast, next year's target supply for the "Sunshine Loan general guarantee" (integration of Sunshine Loan Bank and Sunshine Loan for Workers) is 3.37 trillion won, down 1.16 trillion won from this year's target (4.53 trillion won).
The government said it will integrate and operate policy-based inclusive finance products, which are divided by differences in eligible recipients, funding sources, and handling institutions, starting in January next year. The Sunshine Loan special guarantee is positioned as a "high-interest alternative fund" product to support the lowest-credit borrowers who have no choice but to use high-interest loans such as moneylenders and illegal private financing. It targets the lowest-credit borrowers with annual income of 35 million won or less and in the bottom 20% of credit. President Lee Jae-myung criticized the 15.9% annual interest rate as "too cruel," and the special guarantee for the lowest-credit borrowers will be integrated into this product starting next year.
The Sunshine Loan general guarantee has higher standards than the special guarantee in terms of financial consumers' income and credit rating. The policy goals are also different. It focuses on supplying emergency living-stabilization funds to low-credit borrowers while helping them settle into the formal financial sector such as banks.
Sunshine Loan Bank, which will be integrated into the Sunshine Loan general guarantee, is a "stepping-stone" product that allows diligent repayers who have used policy-based inclusive finance for at least six months and have reduced liability or improved credit to obtain bank loans at lower interest rates. As of the second quarter, the average bank interest rate for Sunshine Loan Bank was 4.71% to 8.25% annually, about half the interest rates of card loans (long-term card loans) that low-credit borrowers turn to when they need quick cash. According to the Credit Finance Association, as of the end of last month, the average interest rate for card loans at eight standalone card companies was in the 13% to 15% range.
A KINFA official said, "We judged it appropriate to focus more on roles that the private sector, including banks, cannot fulfill, so we set a higher target for supplying the Sunshine Loan special guarantee," and added, "For mid- to low-credit borrowers, more support should come from the private sector."
In the financial sector, some argue that concentrating policy-based inclusive finance on the lowest-credit borrowers could create a support gap for low-credit, low-income people. Low-credit borrowers also find it nearly impossible to conduct transactions in the formal system without a government guarantee, raising concerns they could hover outside the system. People Power Party lawmaker Kim Sang-hun said, "While the government is clinging to showy 'handouts for the lowest-credit borrowers,' the ladder for ordinary people to enter the formal system is being kicked away," adding, "Financial authorities must present fundamental measures to safeguard the sustainability of inclusive finance."