Invest1 publisher2 min readPublished
Korea's FSS wants consumer lenders to guarantee bank loans to low-credit borrowers
FSS Governor Lee Chan-jin proposed a sandbox pilot in which Korean consumer lenders would screen and guarantee bank loans to mid- and low-credit borrowers. Banks would supply the money and the lenders would carry the default risk, in a business Korean law does not yet allow.
The Investor · Invest desk
What happened
- Korean consumer lenders raise money mainly from non-bank institutions and have shifted toward higher-credit and secured borrowers to stay profitable under a 20% interest rate ceiling.
- Hansung University economist Kim Sang-bong said the supply of credit to low-credit borrowers has been declining since COVID-19.
- FSS bureau head Song Kyung-yong also listed higher capital requirements for cash lending businesses and flexible-rate loan products for review.
- Jung Sung-woong, who chairs the Consumer Loan Finance Association of Korea, said it would ensure borrowers recover the full amount of any interest charged above the legal ceiling.
- Some consumer finance lenders, none of them named, are reported to have agreed with the guarantee approach.
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Why it matters
- exposure In a downturn, defaults on bank-funded low-credit loans would fall on consumer lenders' capital through the guarantees, a risk the sector now avoids by staying out of unsecured low-credit lending.
- decision Banks weighing the pilot have to underwrite each lender's ability to pay out on a guarantee, so the capital-requirement review on Song's list becomes part of their lending decision.
- constraint Until the law is revised the model cannot leave the sandbox, so whatever low-credit supply it adds stays limited to the size of the pilot.
A consumer lender that funds itself through non-banks has to cover its credit losses with whatever is left between its funding cost and the 20% ceiling [1]. In the Japanese model the lender does not fund the loan at all. The bank or another institution lends, and the money lender screens the borrower and guarantees repayment [1][8]. The lender's non-bank funding cost drops out, and what it keeps is the obligation to pay when a borrower defaults [2]. In my view that changes what sits on these companies' books. A guarantee book is a set of promises to pay on loans sitting at banks [2].
Song Kyung-yong, who heads the FSS inclusive finance protection bureau, set out the order of events [4]. "At present, credit guarantees by the consumer lending business are not permitted by law," he said [5]. "We will run a pilot through the financial regulatory sandbox, and if results come out, we will move toward pursuing a revision of the law" [6]. Lee presented the idea at a National Assembly debate on inclusive finance aimed at stamping out illegal private lending [3].
Inside the sandbox, lenders could guarantee the higher-credit borrowers they already prefer. That would add bank-funded volume while low-credit borrowers saw little new supply. The other path has the guarantees reaching the borrowers Lee had in mind when he called the sector the last line of institutional finance [15]. I'd expect the first, at least while the pilot is small. The account ties the retreat from low-credit lending to non-bank funding and the 20% ceiling together, and the guarantee addresses only the funding [10][2]. Changing the cap itself, to a floating rate or one set by sector, was Kim Sang-bong's proposal [13]. The debate record does not say how a guarantor would be paid, or whether that payment would count against the ceiling [4].
The view is wrong if the pilot's guaranteed loans go mostly to borrowers below the credit band lenders now serve. Kim, an economics professor at Hansung University, said consumer lenders' funding channels should be broadened alongside the government's own supply of inclusive finance [16].
What to watch
- Whether the guarantee pilot receives a regulatory sandbox designation, and which banks and consumer lenders sign up to it.
- The credit-score mix of loans guaranteed in the pilot, compared with the borrowers registered lenders already serve.
- Any draft amendment to the consumer lending law, and whether it pairs guarantee powers with the higher capital requirements Song listed.