[Exclusive] Delinquencies and defaults among low-credit borrowers fuel vicious cycle... Government-backed inclusive finance subrogation payments to hit KRW 1.35 trillion next year

Estimated guarantee liability payments of KRW 1.3472 trillion next year
Up 30.5% from this year's projection
Financial sector contribution burden grows... delinquency rate among vulnerable borrowers tops 10%
Managing defaults and supporting credi

With the burden of high interest rates continuing, the Korea Inclusive Finance Agency (KIFA) is expected to spend nearly KRW 1.35 trillion next year to repay loans on behalf of low-credit borrowers who cannot make their payments. That is more than KRW 300 billion above this year’s forecast. Although funding for policy-based inclusive finance is being expanded, including through higher contributions from the financial sector, the burden on the government and financial institutions is also expected to grow as defaults among vulnerable borrowers increase.

According to relevant government agencies on October 14, financial authorities and KIFA estimate that guarantee liability payments from the Inclusive Finance Supplementary Account will total KRW 1.3472 trillion next year. That is KRW 314.7 billion (30.5%) more than the estimated KRW 1.0325 trillion this year. Payments from the same account totaled KRW 853.4 billion last year.

When a borrower who has taken out a loan from a financial institution backed by a KIFA guarantee cannot repay it, KIFA pays the institution under the guarantee agreement. This is known as subrogation. The Inclusive Finance Supplementary Account is a separate KIFA account funded by contributions from the government and financial institutions, as well as guarantee fee income. It is used to guarantee loans for low-income and low-credit borrowers and to make subrogation payments. An increase in subrogation payments means a greater burden from vulnerable borrowers’ repayment defaults.

Defaults among low-credit borrowers using policy-based inclusive finance products are also increasing. According to data submitted to and released by KIFA at the office of Park Seong-hoon of the People Power Party, the subrogation rate for the Special Guarantee for the Lowest Credit Borrowers rose from 31.4% in March this year to 33.7% in June. The rate for Sunshine Loan 15, which supports low-income and low-credit borrowers, also rose from 28.1% to 29.0% over the same period.

The Bank of Korea also warned of the risk of defaults among vulnerable borrowers due to rising interest rates in its Financial Stability Report released in September. As of the end of June this year, the delinquency rate for vulnerable borrowers who had multiple loans and were either low-income or low-credit stood at 10.39%, more than 10 times the delinquency rate for all household loans (0.98%).

The financial sector’s contribution burden has already increased once. In April this year, an amendment to the Enforcement Decree of the Inclusive Finance Act raised the common contribution rate charged to financial institutions based on their outstanding household loans. The rate rose from 0.06% to 0.1% per year for banks and from 0.03% to 0.045% per year for non-bank financial institutions. Financial authorities estimate that this will increase annual contributions from the financial sector by KRW 197.3 billion, from KRW 434.8 billion to KRW 632.1 billion.

Some in the financial sector say KIFA should strengthen its management of subrogation and recovery rates to ensure the sustainability of policy-based inclusive finance. They argue that, alongside expanding the supply of funds, KIFA should support debt restructuring and credit recovery for vulnerable borrowers, helping them regain their ability to repay.

A financial sector official said, "Rather than continuing simply to expand the supply of inclusive finance, we need to build a virtuous cycle in which policy-based inclusive finance support leads to financial independence by helping borrowers restore their credit and creating pathways for them to access mainstream financial products."

This content was produced with the assistance of AI translation services.