Korea to Tighten Access to Low-Income Loan Program on `Excessive' Demand
South Korea to Tighten Criteria for State-Backed Loan Progra
Antoine Antoniol/Bloomberg
A file photograph shows Chin Dong Soo, South Korea's chairman of the Financial Services Commission. The regulator plans to require applicants to provide information on their earnings to prevent high-income individuals from taking advantage of the program, Chin said.
A file photograph shows Chin Dong Soo, South Korea's chairman of the Financial Services Commission. The regulator plans to require applicants to provide information on their earnings to prevent high-income individuals from taking advantage of the program, Chin said. Photographer: Antoine Antoniol/Bloomberg
South Korea will tighten criteria on a government loan program for low-income households after seeing “excessive” demand in the first month, the head of the country’s financial regulator said.
“I was surprised to find out that there has been excessive demand,” Chin Dong Soo, chairman of the Financial Services Commission, said in an interview in his Seoul office on Sept. 3. The regulator plans to require applicants to provide information on their earnings to prevent high-income individuals from taking advantage of the program, Chin said.
South Korea introduced the five-year Sunshine Loan program in July as part of a government push to bolster living standards among lower-income households. Borrowers with weak credit ratings will be able to tap into as much as 10 trillion won ($8.5 billion) of loans with capped interest rates. An amount equivalent to almost 5 percent of the total was lent in the program’s first month.
Koreans with poor credit records are often denied loans from larger commercial banks and have to borrow at interest rates of up to 40 percent from consumer or private lenders, according to Chin.
“There is a little criticism that some high-income people could get this loan at a lower interest rate,” the FSC chairman said. “We are going to add the criteria of annual earnings” to fine-tune eligibility, he said.
A total of 485 billion won was provided for 55,447 borrowers between July 26 and Aug. 27, the Sunshine Loan program’s first month, according to the regulator.
‘Huge’ Rate Gap
Applicants for subsidized loans currently only have to provide their credit ratings. Under the program, financial institutions including the National Agricultural Cooperative Federation, the National Federations of Fisheries Cooperatives and mutual savings banks will lend to people who have scores of six or lower on a 10-grade system.
They charge a maximum interest rate of 13 percent, while state-run agencies guarantee 85 percent of the lending, according to the FSC. Chin said the program may help drive down borrowing costs imposed by consumer lenders.
Over the first month, Sunshine lending “had some kind of success because it worked like a bridge between loans provided by commercial banks and consumer lending companies,” he said, calling the gap in interest rates “huge.”
Some 1.7 million South Koreans owed a combined 5.9 trillion won to 6,850 consumer lenders at the end of 2009, according to an FSC survey released in May. The average annual interest rate on loans without collateral was 41 percent, the data showed.
Microfinance Loan
The regulator estimates the program will save 6 trillion won of interest costs for low-income households.
South Korean President Lee Myung Bak, who began the second half of his five-year term last month, is stressing economic policies that may appeal to low-income people. His ruling Grand National Party suffered a surprise loss in June elections even as exports led an economic recovery.
Asia’s fourth-largest economy expanded 1.4 percent over the three months to June from the first quarter and 7.2 percent from a year earlier, the Bank of Korea said on Sept. 3.
South Korea last year introduced another microfinance loan to help self-employed people with low incomes raise funds. The ‘Smile Microcredit Bank’ program is run by donations from businesses including Samsung Group and Hyundai Motor Group.
To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net
Rate These Stories
Rate this Page