A commissioned study has found that the government's plan to inject 9.4 trillion won into the Financial Stability Fund for Low-Income Households over the next five years to expand loans for low-credit borrowers could result in losses of approximately 3.4 trillion won.
An analysis by The Seoul Economic Daily of a report from the Korea Inclusive Finance Agency revealed that operating the fund without addressing institutional loopholes in current microfinance policies would inevitably lead to massive defaults. The Financial Stability Fund for Low-Income Households is a statutory fund to be established within the agency by consolidating scattered accounts such as Sunshine Loans and Microfinance to ease the financial burden on low-income vulnerable groups. The ruling party and government are rushing to pass legislation to create the fund.
There is no reason to object to supporting financial stability and recovery for vulnerable populations by providing low-interest loans. It is also the government's duty to help financial consumers who are pushed into the high-interest private lending market because they cannot access institutional financing. However, if lax lending practices and poor post-loan management lead to fund insolvency and microfinance becomes perceived as "free money," these problems should be corrected in advance.
In fact, the scale of subrogation payments—where the government repays loans on behalf of defaulting borrowers—has been surging. For Sunshine Loans, the flagship microfinance lending program, subrogation payments reached 1.52 trillion won in 2023, 1.47 trillion won in 2024, and 1.11 trillion won last year. Far from declining, defaults have remained serious enough to exceed 1 trillion won for three consecutive years. Notably, the subrogation rate for Sunshine Loan 15, which targets the lowest credit borrowers, reached 26.8%, the highest since the product's launch in 2019.
The Financial Stability Fund for Low-Income Households must thoroughly analyze the problems that emerged from Sunshine Loan operations and find solutions that achieve both financial support for low-income groups and fund soundness. It is necessary to design products and screening structures more precisely to minimize default risks and to require borrowers to bear some responsibility to prevent moral hazard. The government's view that social benefits outweigh losses because loans contribute to vulnerable borrowers' asset formation, even when not repaid, is complacent. The integration of microfinance programs should serve as an opportunity to enhance the fund's fairness and transparency to a trustworthy level, including by creating sophisticated indicators that periodically evaluate performance, default volumes, and social impact by product category.
