Online investment-linked finance businesses have expanded credit loans for mid- to low-credit borrowers through linked investments with savings banks. Additional regulatory improvements by financial authorities have now laid the groundwork to extend lending to sole proprietors. With higher caps on linked investments by financial firms and possible use of a credit assessment infrastructure for small merchants, funding conditions for the sector are expected to improve.

The latest changes focus on supporting the sector’s push to expand mid-rate loans. That would allow platforms that faced limits in raising investment funds even after identifying borrowers who have difficulty financing through traditional lenders to use additional funds from financial firms.

With the industry still heavily skewed toward secured loans and only a limited number of firms holding their own credit scoring models, deregulation will likely need to be backed by each firm’s credit assessment capabilities and soundness management for it to lead to a real expansion in credit loans.

According to the financial industry on Sept. 22, the Financial Services Commission held a meeting with the online investment-linked finance industry chaired by Vice Chairman Kwon Dae-young (권대영) and announced measures to boost funding for mid- to low-credit borrowers. Key items include easing investment caps for top platforms, expanding linked investments by financial firms and building a credit scoring infrastructure for sole proprietors.

IMPROVING FUNDING CONDITIONS FOR CREDIT LOANS... REGULATORY EASING FOCUSED ON TOP FIRMS

Online investment-linked finance is a P2P lending service that connects investors and borrowers through online platforms. Its main role is to supply mid-rate loans to mid- to low-credit borrowers who have difficulty raising funds through traditional lenders, using alternative credit assessment technology.

Even platforms that have their own credit scoring models can struggle to execute loans if they cannot raise funds from investors after identifying loan products. To ease these funding constraints, linked investments using funds from financial firms are becoming a new channel for expanding personal credit loans.

Financial authorities have expanded participation after allowing savings banks’ linked investments in online investment-linked finance as an innovative financial service in July 2024. As of the end of July this year, linked investments by 23 savings banks total 508.0 billion won.

Despite the inflow of funds from financial firms, the sector’s business structure remains concentrated in secured loans. As of the end of last year, real estate-backed loans and stock-backed loans known as stock loans accounted for 40.5 percent and 33.3 percent, respectively, exceeding 70 percent of the total. Over the past 5 years, the share of credit loans averaged 11.6 percent.

Financial authorities have moved to introduce additional improvements to address the bias toward secured loans and to encourage expansion of credit loans. Rather than easing investment regulations across all platforms, the approach provides incentives to top firms with loan performance for mid- to low-credit borrowers and credit assessment capabilities.

The FSC will introduce a system for "top online investment-linked finance businesses for mid- to low-credit loans" and raise the selected firms’ self-funding investment cap to 40 percent from 20 percent of the amount raised. It will also increase the cap on linked investments by financial firms to 50 percent from 40 percent.

With a higher cap on linked investments by financial firms, loan products that previously required at least 3 financial firms to participate will be able to meet funding targets with investment from 2 financial firms. For platforms, that reduces the burden of raising investment funds needed to execute loans.

Draft criteria presented by the FSC for selecting top firms include having performance in personal and sole proprietor credit loans over the past 3 years, and meeting at least once in a fiscal year a condition of either a mid- to low-credit loan share of 60 percent or more or an outstanding balance of 30.0 billion won or more. It also presented criteria including having an in-house alternative credit scoring model and development staff, an average interest rate on personal credit loans of 15 percent or less, a delinquency rate below 5 percent and equity capital of at least 1.0 billion won.

According to financial authorities, 7 of 47 online investment-linked finance firms have their own personal credit scoring model, accounting for 15 percent of the total. Securing credit assessment capabilities by firm is expected to become important for the deregulation to translate into actual loan growth.

The overall investment cap for retail investors across the sector will also be raised to 50,000,000 won from 40,000,000 won. The plan also allows small, diversified investments in personal and sole proprietor credit loans to improve funding conditions from individual investors.

EXPANDING LOANS TO SOLE PROPRIETORS... SUPPORTING CREDIT SCORING AND FUNDING AT THE SAME TIME

Personal credit loans to sole proprietors are cited as an area where the sector can expand loan handling going forward. Until now, platforms have mainly developed credit scoring models targeting individuals.

As of the end of last year, sole proprietors accounted for just 2.9 percent of all linked loans. Only 5 firms handled credit loans to sole proprietors, and only 5 had dedicated credit scoring models.

To expand loans to sole proprietors, the sector needs a foundation separate from existing personal credit assessment that can evaluate repayment ability by reflecting business-related information such as sales, industry and commercial areas.

To address these constraints, financial authorities will pursue system linkages so platforms can use a credit scoring model specialised for small merchants, known as SCB.

SCB is a credit scoring model that combines a growth grade using non-financial information such as sales, industry and commercial area information of small merchants with existing credit ratings. A pilot operation began at the end of August this year. Authorities plan to first pursue system linkages for major platforms and then expand in stages.

Once platforms can use an external credit scoring infrastructure, even firms without their own dedicated model for sole proprietors will secure a means to assess a business owner’s credit risk.

The scope of linked investments by financial firms will also be expanded from personal credit loans to include credit loans to sole proprietors. The plan is to increase participation in linked investments not only by savings banks but also by mutual finance institutions.

That means the foundations for both credit scoring and funding to expand loans to sole proprietors will be put in place at the same time. Still, the actual scale of loan expansion is likely to depend on how effectively platforms use the new credit scoring infrastructure and secure investment participation from financial firms.

STRENGTHENING INVESTOR PROTECTION... TASKS OF SOUNDNESS MANAGEMENT AND BUILDING TRUST

Expanding credit loans to mid- to low-credit borrowers and sole proprietors presents a new growth opportunity for the sector, while also posing a task of managing loan soundness and investor trust.

Online investment-linked finance operates by extending loans to borrowers with funds provided by investors. Because borrower delinquencies or defaults can lead to investor losses, the importance of credit assessment and post-loan management increases as loan volumes grow.

Financial authorities included external verification of key management information, additional disclosure of loss rates and improvements to non-performing loan management systems in the latest changes.

Platforms currently receive external audits of their annual financial status, but linked loan receivables are excluded from external audits because they are not reflected in a firm’s financial statements. Going forward, authorities plan to introduce external verification for key management information such as linked loan status and sales of non-performing loans. They also plan to require disclosure of loss rates in addition to existing delinquency rates.

The aim is to expand information that allows investors to judge each firm’s loan screening and post-loan management capabilities, strengthening investor protection and boosting trust in the sector. Authorities also plan to improve procedures for the closure and wind-down of troubled platforms and supplement related systems so investor protection can be provided even after operations are suspended.

The FSC will accept applications for innovative financial services in the first quarter of next year for introducing the top-firm system and expanding linked investments by financial firms, and will review them. It will push to implement the higher investment cap for retail investors and the linkage to a credit scoring infrastructure for sole proprietors with a target of March next year.

If the measures take effect, the sector expects it will be able to expand funding for mid- to low-credit borrowers and broaden the base for handling loans to sole proprietors.

An industry official said, "We welcome these improvements," adding, "We will be even more faithful to our original role of stably supplying funds to mid- to low-credit borrowers."