'Inclusive finance' backfires as lower-credit borrowers receive better rates than higher-credit individuals – The Korea Times
A government-initiated lending policy is backfiring against its purpose of supporting low-income borrowers as it also rewards those with low credit scores, industry officials said Monday.
They said the policy, part of “inclusive finance” efforts, wrongly treats low-income and low-credit-score borrowers alike, even though low-credit borrowers may just be delinquent or inconsistent in repayment rather than low in earnings.
Under the circumstances, these low-credit borrowers receive more favorable borrowing rates than those with higher credit scores, despite falling short on key credit assessment criteria, including repayment history and outstanding balances.
Many intended beneficiaries of "inclusive finance" have credit scores between 651 and 700, placing them third-lowest of nine groups as defined by the Korea Federation of Banks, according to industry officials. Scores of 951 to 1,000 are the highest, while 600 or below is the lowest.
Data compiled by the federation in October showed three of the four major commercial banks — KB Kookmin, Hana and Woori — charged higher rates for borrowers in the 651-700 range than for those with lower credit scores.
At KB Kookmin, the rate for this group was 5.4 percent, compared with 4.05 percent for scores between 601 and 650 and 3.7 percent for scores of 600 or lower.
At Hana Bank, borrowers in the 651-700 range were charged 4.54 percent, compared with 3.7 percent for the 601-650 group and 3.43 percent for those with 600 or lower.
At Woori Bank, the rate for 651 to 700 was 4.95 percent, lower than 5.11 percent for 601-650, but still higher than 4.26 percent for the lowest-scoring group.
Shinhan Bank was the only exception, offering 5.45 percent for borrowers in the 651-700 range, compared with 9.11 percent for scores between 601 and 650 and 11.36 percent for scores of 600 or lower.
“This pattern shows a reversal of the usual lending practice,” said the Citizens' Coalition for Economic Justice (CCEJ), a Seoul-based civic group. “The trend appears to be the result of the government’s emphasis on financial support for vulnerable groups, which has been applied mistakenly by the banks.”
A researcher at a private think tank said on condition of anonymity that if the trend continues, it could deepen “reverse discrimination,” with higher-credit customers paying more than lower-credit borrowers.
The researcher noted that the government has increasingly emphasized “inclusive finance," most recently in comments made by President Lee Jae Myung on Nov. 13, but has not clearly distinguished between low-income and low-credit borrowers.
During a Nov. 13 meeting of senior presidential aides, Lee said, “The current banking system has become a financial hierarchy that forces the poor to pay high interest.”
He called on relevant parties to address the problem. Financial holding companies plan to spend up to 70 trillion won ($47.46 billion) over the next five years to expand inclusive finance policies.
“Despite these efforts, the president and financial authorities have not clearly distinguished between the poor and delinquent borrowers,” the researcher said. “Being low-credit does not necessarily mean being low-income, and this difference must be addressed for effective, targeted implementation.”
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They said the policy, part of “inclusive finance” efforts, wrongly treats low-income and low-credit-score borrowers alike, even though low-credit borrowers may just be delinquent or inconsistent in repayment rather than low in earnings.
Under the circumstances, these low-credit borrowers receive more favorable borrowing rates than those with higher credit scores, despite falling short on key credit assessment criteria, including repayment history and outstanding balances.
Many intended beneficiaries of "inclusive finance" have credit scores between 651 and 700, placing them third-lowest of nine groups as defined by the Korea Federation of Banks, according to industry officials. Scores of 951 to 1,000 are the highest, while 600 or below is the lowest.
Data compiled by the federation in October showed three of the four major commercial banks — KB Kookmin, Hana and Woori — charged higher rates for borrowers in the 651-700 range than for those with lower credit scores.
At KB Kookmin, the rate for this group was 5.4 percent, compared with 4.05 percent for scores between 601 and 650 and 3.7 percent for scores of 600 or lower.
At Hana Bank, borrowers in the 651-700 range were charged 4.54 percent, compared with 3.7 percent for the 601-650 group and 3.43 percent for those with 600 or lower.
At Woori Bank, the rate for 651 to 700 was 4.95 percent, lower than 5.11 percent for 601-650, but still higher than 4.26 percent for the lowest-scoring group.
Shinhan Bank was the only exception, offering 5.45 percent for borrowers in the 651-700 range, compared with 9.11 percent for scores between 601 and 650 and 11.36 percent for scores of 600 or lower.
“This pattern shows a reversal of the usual lending practice,” said the Citizens' Coalition for Economic Justice (CCEJ), a Seoul-based civic group. “The trend appears to be the result of the government’s emphasis on financial support for vulnerable groups, which has been applied mistakenly by the banks.”
A researcher at a private think tank said on condition of anonymity that if the trend continues, it could deepen “reverse discrimination,” with higher-credit customers paying more than lower-credit borrowers.
The researcher noted that the government has increasingly emphasized “inclusive finance," most recently in comments made by President Lee Jae Myung on Nov. 13, but has not clearly distinguished between low-income and low-credit borrowers.
During a Nov. 13 meeting of senior presidential aides, Lee said, “The current banking system has become a financial hierarchy that forces the poor to pay high interest.”
He called on relevant parties to address the problem. Financial holding companies plan to spend up to 70 trillion won ($47.46 billion) over the next five years to expand inclusive finance policies.
“Despite these efforts, the president and financial authorities have not clearly distinguished between the poor and delinquent borrowers,” the researcher said. “Being low-credit does not necessarily mean being low-income, and this difference must be addressed for effective, targeted implementation.”
source
This article was autogenerated from a news feed from CDO TIMES selected high quality news and research sources. There was no editorial review conducted beyond that by CDO TIMES staff. Need help with any of the topics in our articles? Schedule your free CDO TIMES Tech Navigator call today to stay ahead of the curve and gain insider advantages to propel your business!
