South Korea's financial regulators are considering expanding their inclusive finance evaluation system, set to be introduced for banks, to non-bank financial institutions, after President Lee Jae-myung called for rewards and penalties based on lenders' inclusive finance performance.
According to the financial industry on Nov. 11, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are examining the need to expand the inclusive finance evaluation framework, scheduled to be introduced for banks in the second half of this year, to the non-bank sector including savings banks, mutual credit cooperatives and capital firms.
"It would be possible to benchmark the bank inclusive finance evaluation system for the non-bank sector," a financial regulatory official said. "We are comprehensively reviewing measures to expand inclusive finance, including redefining the role of consumer finance institutions."
The move came after President Lee asked whether there was "a way to give disadvantages or benefits by evaluating how much inclusive finance has been realized," calling for institutional incentives. At a Cabinet meeting on the 7th, President Lee told FSC Chairman Lee Eok-won, "You could make it mandatory (for inclusive finance) by creating evaluation or management guidelines for financial institutions," adding, "Please devise such measures well."
However, introducing the inclusive finance evaluation system for the non-bank sector is expected to take time. Transplanting the same evaluation system used for banks to savings banks and mutual credit cooperatives is not easy, so a separate evaluation framework must be prepared for each sector.
In addition, the savings bank, mutual credit, capital and card industries show large differences in asset size and business environment even within the same sector, requiring careful design. "Unlike the banking sector, operations and regulations in the non-bank sector tend not to be standardized," another financial regulatory official said. "The banking sector's evaluation system cannot be brought over as-is, so we need to consider a model that reflects the characteristics of each sector."
Separately, the FSC and FSS are in the final stages of consultations on the detailed criteria for the banking sector's inclusive finance evaluation system. They plan to conduct a pilot evaluation as early as this month to verify the model's validity before full implementation in the second half of the year. The key evaluation items are loan supply for low-income earners and small business owners, such as Jingeomdari Loans and Saehuimang Holssi, along with loan supply to small and medium-sized enterprises and in-house debt restructuring performance. Evaluation grades will be divided into five tiers. Banks receiving top grades will have their contributions to the Korea Inclusive Finance Agency reduced, while those with poor performance will face higher contribution rates.
Inside and outside the financial authorities, there is speculation that the credit rating distribution of borrowers and lending rate gaps at each bank could be reflected as evaluation indicators. Kim Yong-beom, Director of the Presidential Office's Policy Planning Office, recently criticized the irrationality of the current financial market that excludes middle- and low-credit borrowers who have the greatest loan demand.
Additional incentives in terms of financial supervision and regulation are also under review for banks that receive top grades. The FSC is also expected to discuss these matters at the Inclusive Finance Promotion Task Force (tentative name) set to launch this month. The task force will broadly discuss strengthening the public function of finance, including reform of the credit rating system and the role of consumer finance institutions.
Financial industry players believe that the public disclosure of evaluation results will itself be considerable pressure. Receiving the lowest grade could be interpreted as neglecting social responsibility (S) in environmental, social and governance (ESG) management. "From a financial company's perspective, the disclosure of evaluation results is the biggest burden," a financial industry official said.
