A basic loan program pledged by President Lee Jae-myung during the 20th presidential election is resurfacing amid growing debate over so-called "cruel finance." The proposal aims to lend up to 10 million won ($7,300) at low interest rates to low-credit borrowers, providing minimum financial access and easing polarization. Kim Yong-beom, the presidential chief of staff for policy, has called for a broader overhaul of the financial system along similar lines, though market observers say a selective and phased approach is needed.
According to financial industry sources on Tuesday, the Korea Inclusive Finance Agency (KINFA) and the Credit Counseling and Recovery Service will launch a research group next month to introduce basic financial rights. The group will consist of four subcommittees covering legislation, case studies, and data analysis, and will work to conceptualize basic financial rights and develop methodologies to implement them.
Basic financial rights refer to the right to access financial services and credit without discrimination. The core instrument to realize this is the basic loan. "The basic loan is a paradigm shift in the financial system," said Kim Eun-kyung, president of KINFA. "We are considering a plan to lend a certain amount at low rates to the bottom 30% of low-credit borrowers." Kim is also planning a series of basic financial products, including basic savings, insurance and guarantees.
Academic discussions are also under way. The Korean Academy of Financial Consumers held a board meeting on June 30 and approved the establishment of a Financial Basic Rights Committee. The committee will be set up as a special body within the academy to conduct research on basic financial rights. "The basic loan can go beyond welfare and serve as a way to enhance the stability of the financial system," said Kang Kyung-hoon, a professor of business administration at Dongguk University.
Chief of Staff Kim wrote on Facebook on Monday that "credit gaps are amplified along with gaps in employment, income and assets, and the costs eventually spread to society as a whole." He also stressed the need to change the framework of stable management by foreign bank shareholders and soundness regulations that have been emphasized since the Asian financial crisis.
There are also concerns about the basic loan. "The intent of inclusive finance is good, but it could conversely breed credit defaulters," said Lee Jung-hwan, a professor of economics and finance at Hanyang University.
In 2021, the Gyeonggi Research Institute published a report titled "A Study on the Introduction of Basic Financial Policy in Gyeonggi Province." The institute estimated that if basic loans of up to 10 million won at 2.8% annual interest were provided to 19.4 million borrowers (as of end-2019), total lending would reach 194 trillion won. The government's annual burden, including interest costs, was estimated at 77.6 billion won. Expanding the program to all 42.91 million adults aged 19 or older subject to credit evaluation would raise loans to 318.9 trillion won and government costs to 1.1479 trillion won a year. With a basic loan rate of 3.25%, loans were estimated at 103 trillion to 155 trillion won and government costs at up to 620.4 billion won.
Compared with that proposal, the basic loan being pursued by KINFA and the Credit Counseling and Recovery Service has a much narrower target, focusing on the bottom 20-30% of credit scores. "Providing it to all citizens would be difficult, but if limited to a portion of the population, the basic loan is feasible," Kang said. "It would also be possible to integrate various policy financial products currently divided by income standards and fund purposes into a single basic loan."
The basic loan pursued by KINFA and the Credit Counseling and Recovery Service aims to build a minimum safety net so that vulnerable groups facing crises such as unemployment or illness can recover within the formal financial system, rather than turning to illegal private lenders.
Despite extensive efforts by financial authorities and the industry, the credit crevasse — the gap in interest rates and loan availability — remains a reality. According to the Bank of Korea, the average interest rate on new small household credit loans at deposit banks was 6.03% in March. For savings banks in the secondary financial sector, the rate reaches 15.67%. Card loan rates also stand at 13.45% at KB Kookmin, 13.81% at Shinhan, 14.31% at Samsung and 13.45% at Hyundai, while rates for borrowers with credit scores below 700 reach 16% to 18%. Those unable to borrow from banks suddenly face rates jumping to the mid- to high-teens.
The loan landscape is similar. There is a large gap between bank-eligible customers and those who use secondary-tier lenders such as savings banks. This is why Chief of Staff Kim compared the situation to a "large doughnut" with its middle hollowed out, saying the waist of the market, which holds the largest number of borrowers, has been neglected.
According to NICE Information Service, high-credit borrowers with scores of 900 or above accounted for 44.8% of outstanding unsecured loans in the financial sector as of the end of March. The share of low-credit borrowers with scores below 600 fell to 16.2% from 16.6% over the same period. "A crevasse of interest rates and loan availability exists around the 10% rate level," a financial industry official said. "This is why the credit rating system and credit grades need to be reviewed."
While there is agreement on the purpose of the basic loan, sustainability remains an issue. Loans to low-credit borrowers are highly prone to a surge in defaults during economic downturns. KINFA has analyzed that if the government contributes 9.4 trillion won to the Working Class Financial Stability Fund over five years starting next year to expand loans to low-credit borrowers, losses of about 3.4 trillion won could occur.
The government's burden is also unavoidable. If delinquencies rise, the operating entity's burden could grow. Former Bank of Korea Governor Lee Ju-yeol expressed concern in 2021, saying, "I fully acknowledge the side effects of adding more debt on top of enormous required funds, which raises the repayment burden."
Experts say banks' roles should expand beyond current levels but that the entire financial ecosystem needs to be revived. Currently, individuals unable to use banks turn to the secondary financial sector, while those who cannot afford high interest rates rely on mutual finance institutions. But most citizens want to use banks with lower rates, and mortgage lending has become concentrated in banks, causing the ecosystem to collapse. Mutual finance institutions and savings banks that lost customers turned to project financing (PF) against this backdrop. "In the United States and Japan, large banks do not engage in mortgage lending," another financial industry official said. "With regional extinction, local banks are also collapsing, so the entire structure needs to be redesigned."
Some in the market say it is worth considering a structure similar to Japan's, where banks operate lending businesses as subsidiaries. Deregulation is also needed. Proposals include applying a new indicator instead of the Bank for International Settlements (BIS) capital adequacy ratio to savings banks that do not conduct international business, or differentiating capital regulations according to the nature of loans.
◇Loan Crevasse = A phenomenon in which borrowers positioned between banks and secondary-tier lenders find it difficult to borrow from banks, with interest rates jumping from single digits to the mid- to high-teens. The term draws an analogy to the narrow, deep cracks formed when glaciers split.
