Financial authorities have raised the estimated reimbursement rate for the 'special guarantee for low-credit borrowers,' a policy low-income financial product, to over 50% this year. This indicates that more than half of the 10 borrowers are expected to default on their loans, requiring the policy institution to repay the money instead. However, claims have emerged that the deterioration of delinquencies is reaching a level that cannot guarantee the sustainability of the guarantee program, necessitating a comprehensive review of the project.
According to the National Assembly and the financial sector on the 7th, the Financial Services Commission and the Korea Inclusive Finance Agency have raised the expected reimbursement rate for the special guarantee for low-credit borrowers to 53.5% while preparing this year's budget. This is 13.5 percentage points higher than last year's expected reimbursement rate of 40%.
The reimbursement rate refers to the proportion of the amount repaid by policy institutions such as the Korea Inclusive Finance Agency on behalf of borrowers who are unable to repay the principal. For example, if a financial consumer borrowed 10 million won from a bank with an agreement with the Korea Inclusive Finance Agency and is unable to repay 5.35 million won of that amount, it means the agency must cover the entire amount.
Launched in September 2022, the special guarantee for low-credit borrowers is a policy low-income financial product that provides loans of up to 10 million won to borrowers with a credit score in the bottom 10% and an annual income of 45 million won or less. Unlike the 'sunshine loan,' which can only be utilized if there is no past delinquency, this loan can be accessed even with a history of arrears. The aim is to prevent financial consumers from being pushed into illegal moneylending.
The special guarantee for low-credit borrowers gained significant popularity from its early stages. The supply target for its first year in 2022 was set at 60 billion won, but in reality, guarantees amounting to 100.2 billion won (with 34,208 cases) were provided. Subsequently, applications surged in 2023, reaching 292.4 billion won (112,009 cases) in support, although last year's guarantee scale dropped to 193.5 billion won, a decrease of about 40% from the previous year. The reason is that the higher reimbursement rates have reduced the ability to provide support. With resources limited, an increase in the funds needed for reimbursement inevitably decreases the capacity for new guarantees.
The reimbursement rate is rising sharply. The annual reimbursement rates for loans disbursed in 2022 are projected to reach 29.8% by the end of 2023, 45.7% by the end of 2024, and 47.2% by March 2025. However, the recovery of subrogated claims from debtors following repayments remains sluggish. As of the end of February this year, the claim recovery rate stood at 3.1%, falling short of the expected 9.6%. This indicates that the agency has not been able to recover lost funds effectively.
Under these circumstances, the government argues that increasing the budget is necessary to ensure a smooth supply of new guarantees. The budget allocated for the special guarantee for low-credit borrowers this year is 56 billion won, and financial authorities added 36.5 billion won to the supplementary budget that passed through the National Assembly's plenary session on the 2nd.
The National Assembly Budget Office noted in its report on the '2025 supplementary budget analysis' that 'there is a possibility that the estimated reimbursement rate for the special guarantee for low-credit borrowers may exceed expectations' and that 'the sustainability of the program is a concern.' It further stated that 'a redesign of the overall project structure, including support methods and scales, should be considered.'