South Korea's financial authorities will introduce a system to comprehensively evaluate banks' inclusive finance performance and apply differentiated contributions to the Korea Inclusive Finance Agency by up to 20 percent based on the results. The assessment will reflect qualitative indicators such as lending rates and debt restructuring outcomes, not only the scale of funding. Management of non-performing loans at financial public institutions will also be revamped to focus on debtors' economic recovery rather than debt collection.

The Financial Services Commission held the seventh Inclusive Finance Grand Transformation Meeting on Tuesday at the Korea Asset Management Corp's Yangjae Tower, chaired by FSC Chairman Lee Eok-won (이억원). It announced measures to introduce a comprehensive evaluation system for inclusive finance and improve non-performing loan management at financial public institutions.

The evaluation system was designed to encourage financial companies to incorporate inclusive finance into their management strategy and expand it continuously. It aims to create incentives for financial companies to pursue related projects on their own, based on the view that the financial sector's expansion of inclusive finance has so far been driven mainly by responses to government requests.

The evaluation will cover 17 domestic banks. Relative evaluations will be conducted across 3 groups — large banks, small and mid-sized banks, and internet-only banks — to reflect differences by asset size and business model. The Financial Supervisory Service will handle the working-level evaluation, and an evaluation committee that includes a private-sector chair will deliberate and confirm the results.

The evaluation items will consist of 5 categories: governance 10 percent, funding supply 35 percent, debt restructuring 35 percent, social consideration 10 percent, and non-financial services 10 percent. The funding supply and debt restructuring categories will account for 70 percent of the total score.

In the funding supply category, the evaluation will assess performance in supplying policy products and proprietary products to ordinary people and mid- to low-credit borrowers. It will reflect interest rate levels, benefits for diligent borrowers, and lending performance for the financially underserved, in addition to the supply scale.

The debt restructuring category will assess participation in debt restructuring through the Credit Recovery Committee and the courts, financial companies' own debt restructuring, and performance in writing off or selling personal delinquent debt. It will also examine the level of principal and interest reductions and the extent to which normal repayment is maintained after debt restructuring.

In the social consideration category, the evaluation will assess performance in offering preferential savings products for young people, the acceptance rate for requests to lower interest rates, and the amount reduced. The non-financial services category will include performance in linked support for finance, employment and welfare, as well as financial counselling and financial education. Separately, bonus points equivalent to about 10 percent of the total score will also be granted for banks' own efforts to promote inclusive finance.

The results will be disclosed by assigning S, A, B and C grades for each bank group. Contributions to the Korea Inclusive Finance Agency will be increased or reduced within a maximum range of 20 percent for excellent (S), good (A) and insufficient (C) banks.

Banks receiving excellent and good grades will also be offered a benefit of up to a 10 percent reduction in penalties for violations of the Financial Consumer Protection Act. The results will also be reflected in management status evaluations.

The first evaluation of this year's performance will be conducted as a pilot. In March next year, only top-performing institutions will be announced, and incentives and penalties will be applied starting from the following year's evaluation. From next year, the evaluation will be expanded to the secondary financial sector.

FINANCIAL PUBLIC INSTITUTIONS' NPL MANAGEMENT TO BE REORGANISED AROUND REPAYMENT ABILITY AND RECOVERY

The financial authorities will also overhaul the non-performing loan management system at financial public institutions. The policy is to resolve long-term delinquent debt and manage statutes of limitations based on debtors' ability to repay, in order to support economic recovery.

First, when the initial statute of limitations arrives 5 years after delinquency, the authorities will assess repayment ability and, in principle, complete the statute of limitations if the debtor cannot repay. For socially vulnerable groups such as basic living allowance recipients and disability pension recipients, the statute of limitations will be completed without a separate review regardless of the amount in arrears.

Debt for which a second statute of limitations arrives after 15 years of delinquency will be written off unless there is a special reason such as concealment of assets. Existing accumulated long-term non-performing debt of 15 years or more will also be resolved in stages by the second half of next year.

Non-performing debt that is delinquent for more than 5 years and up to 7 years and is 50 million won or less will be reviewed under each institution's plan and either written off internally or sold to Korea Asset Management Corp to be resolved. Debt will be excluded if there are assets that can be recovered or if assets have been concealed.

The authorities will also standardise non-performing loan management criteria that differ by institution and strengthen unified management by Korea Asset Management Corp of written-off debt held by financial public institutions.

The timing for debt restructuring will also be brought forward. Previously, in the case of guaranteed loans, debt restructuring was possible only after the guarantee institution made a subrogation payment, but the rules will be improved to allow applications even before subrogation payment. The authorities also plan to prepare a measure to allow principal reductions even before write-off, which had been possible only after write-off.

The financial authorities plan to implement the improvement measures in phases from the fourth quarter of this year after consultations with related organisations and revisions to internal rules by each institution.

Lee said the financial sector has been actively responding to inclusive finance, but it has also been pursued as a passive task in which the financial sector answers when the government requests. He said it is time to go a step further and build a structure in which financial companies themselves can engage in inclusive finance.

He added that the past year marked a period of groundbreaking structural change in protecting individual debtors and managing delinquent debt, and that a key achievement was the financial sector's shift in perception to focus on debtors' recovery rather than debt collection.