FSS Governor Lee Chan-jin presented the plan on Oct. 1 on revitalizing household finance to eradicate illegal private lending, held at the National Assembly in Yeouido. The session drew Lee, Korea Consumer Finance Association Chairman Jung Sung-woong, FSS Household Finance Protection Department head Song Kyung-yong and Kim Sang-bong, an economics professor at Hansung University, who discussed ways to expand the consumer finance industry's supply of credit to low-income households.
"To fill the lending gap for low-credit borrowers and prevent the spread of illegal private lending, the role of the consumer finance industry, which serves as the last line of institutional finance, is more important than ever," Lee said. He added, "We will test new ideas through the regulatory sandbox, such as a Japanese-style guarantee business model in which consumer finance firms provide screening and guarantees for loans to low-credit borrowers."
Song laid out a specific policy path at the debate. He proposed first piloting the Japanese-style guarantee business in the financial regulatory sandbox and then pursuing legal revisions based on the outcome. "Credit guarantees by consumer finance firms are currently not permitted under the law," Song said. "We will run a pilot through the financial regulatory sandbox, and if it produces results, we will move toward pursuing a legal amendment." Some top-tier consumer finance firms are said to have agreed with the approach.
Under the Japanese screening-and-guarantee model, banks and other lenders extend loans to mid-to-low credit borrowers while consumer finance firms assess the borrowers' credit and provide guarantees.
Song also flagged for review measures including maintaining standards for unsecured loans to low-credit borrowers at registered consumer finance firms, launching products with flexible interest rates, and raising capital requirements for money-lending businesses.
The discussions come as credit supply from the consumer finance industry to low-credit borrowers declines. With consumer finance firms funding themselves mainly through non-bank financial institutions, they have shifted toward higher-credit borrowers and secured lending rather than unsecured loans to low-credit borrowers in order to maintain profitability within the 20% interest rate cap.
Kim, who gave the keynote presentation, said financial supply to low-credit borrowers has shrunk since the COVID-19 pandemic and stressed the need to broaden funding channels for consumer finance firms alongside government-backed household lending. He also proposed converting the statutory interest rate cap to a floating formula or applying it differently by industry segment.
