As the government expands pressure for “inclusive finance” on all fronts, banks are growing more concerned. Some warn that banks’ asset-quality burden could increase as expanded policy finance for low-income borrowers and tighter management of long-overdue debt are pushed at the same time.

Financial companies agreed on May 13 to sell bonds held by the private bad bank Evergreen First Securitisation SPC (상록수제일차유동화전문유한회사), known as Evergreen (상록수). The move follows a strong criticism by President Lee Jae-myung (이재명), who called long-term debt collection practices “primitive predatory finance.”

The Financial Services Commission held an emergency meeting on the day and decided how to handle long-overdue bonds held by Evergreen. With member firms and asset managers in attendance, participants agreed to sell the long-overdue bonds in a lump sum to the Saedo-yak Fund as soon as possible. They also decided to sell remaining bonds that are not eligible for the Saedo-yak Fund to Korea Asset Management Corp as quickly as possible and halt long-term collection.

Once the Saedo-yak Fund buys the bonds, collection will stop immediately, and debts of vulnerable groups such as basic livelihood beneficiaries will be written off without a separate review. The commission plans to conduct a full survey of securitisation companies that hold long-overdue bonds in a similar form to Evergreen.

The government and financial regulators have recently kept up daily calls for inclusive finance from banks. Regulators have also called for expanded lending to mid- and low-credit borrowers, adding to related discussions. In cabinet meetings and on social media, Lee has repeatedly stressed strengthening the public role of financial institutions, and the presidential office has publicly mentioned the need to expand financial access while criticising a lending structure centred on high-credit borrowers.

In line with that, the Financial Services Commission said it plans to prepare the launch of an “inclusive finance task force” this month. The task force is expected to discuss broader financial-sector restructuring, including revamping credit evaluation systems, expanding loans to mid- and low-credit borrowers, and redesigning policy finance for low-income borrowers.

Supply of policy finance for low-income borrowers is also expected to expand further. The Financial Supervisory Service has set this year’s banking-sector target for New Hope Seed loans at 5.1 trillion won, up 20 percent from last year. As calls to strengthen inclusive finance continue, discussions are said to be moving beyond simply raising targets to reshaping actual lending toward lower-credit borrowers. The financial sector says pressure for additional expansion is effectively continuing.

New Hope Seed is considered a representative policy finance product for low-income borrowers. It is an unsecured credit loan provided to low-income and low-credit borrowers, and more than 42 trillion won was supplied to about 2.93 million people from its 2010 launch through the end of last year.

Growing asset-quality burden ... calls for “adjusting the pace”

The problem is that expanding inclusive finance could directly weigh on banks’ profitability and soundness. Some in and outside the banking sector warn that inclusive finance performance could turn into excessive competition over numbers. As regulators consider establishing a comprehensive evaluation system to assess banks’ inclusive finance performance, some analysts say pressure to implement policy is effectively intensifying.

In particular, many point out that if the share of lending to mid- and low-credit borrowers rises sharply, it will be difficult to rule out the possibility of higher delinquency rates.

Delinquency rates for New Hope Seed loans at banks were in the mid-1 percent range as of the end of last year, but the financial sector believes that risks of bad loans could grow quickly if the share of even lower-credit borrowers expands. If the share of low-credit borrowers becomes excessive, banks’ provisioning burden would inevitably increase, they say.

There are also concerns about the sustainability of the policy finance system for low-income borrowers. The government and the ruling party are pushing to establish a “Stabilisation Fund for Low-income Finance” to supply funding for policy finance in a stable way, but some point out that the pace of growth in subrogation payments is too fast.

Recovery rates for major policy products, including Sunshine Loan 15 and special guarantees for the lowest-credit borrowers, remain in the single digits to the low teens, while subrogation payments total hundreds of billions of won each year. Some warn that the burden of losses from policy finance could be shifted to financial firms, leading to higher financial costs for ordinary borrowers.

Delinquency rates at major commercial banks have in fact been rising recently. With prolonged high interest rates and a slowing economy combining, concerns are also growing over bad loans in household and self-employed lending. The financial sector says expanding inclusive finance is necessary, but the pace must be adjusted and risks managed at the same time.

A financial industry official said, “Voices calling for the social responsibility of finance are growing louder.” The official added, “We agree with the policy direction of supporting vulnerable groups, but it is true that the burden is growing in many ways.”