South Korea to shorten delinquency record periods, ease credit card access for youth and foreigners

Financial authorities are moving to shorten the period that delinquency records are used in credit assessments and to expand the use of alternative credit scoring.

The Financial Services Commission said Wednesday it would pursue structural reforms to the financial system aimed at institutionalizing and permanently embedding inclusive finance, as part of its second-half work report.

Financial authorities plan to introduce a comprehensive evaluation system as part of efforts to institutionalize inclusive finance. Banks will be subject to the new framework this year, with the system extended to all financial sectors next year. The evaluation will cover a range of areas including the volume of lending to low-income borrowers, non-financial financial counseling and corporate governance.

On top of that, each financial institution will be required to appoint a chief inclusive finance officer to oversee inclusive finance strategy and internal controls.

Authorities also plan a sweeping overhaul of the personal credit assessment system. Where evaluations have traditionally focused on delinquency history, the new approach will incorporate forward-looking assessments of growth potential into loan screening. Specific measures include expanding the use of alternative credit scoring and shortening the period during which delinquency records factor into credit ratings.

To address interest rate gaps faced by vulnerable borrowers with low to mid-range credit scores, authorities will expand the supply of inclusive finance products across the financial sector. The Sae Huimang Holssi loan program will be expanded by 2 trillion won ($1.34 billion) through 2028, and the target share of low-to-mid credit borrowers at internet-only banks will rise from the current 30 percent to 35 percent.

Industrial Bank of Korea plans to launch a product offering a flat annual interest rate of 4.9 percent regardless of the borrower's credit score. Authorities are also preparing collaborative programs between savings banks and commercial banks tailored to low-to-mid credit borrowers.

To ensure a stable supply of policy-based lending to low-income households, authorities will introduce a financial stability fund for low-income borrowers. The plan aims to expand product supply within 30 percent of the existing budget and to broaden interest rebates on Haetsal Loan special guarantees as well as the supply of Haetsal Loan Youth products.

A new loan product linked to welfare programs will also be introduced. The scheme is designed to bring vulnerable borrowers back into the formal financial system by encouraging micro-repayments of 10,000 won per month, with a maximum limit of 1 million won, a 10-year maturity and an annual interest rate of 4.5 percent. FSC Secretary-General Shin Jin-chang said at a briefing Tuesday that the commission would conduct in-person reviews to carefully verify whether applicants genuinely need the funds, citing concerns about moral hazard in online consultations.

The five major financial groups will develop specialized products through their respective Smile Microcredit foundations. The Shinhan Smile Foundation plans to offer principal and interest repayment rebates to borrowers who have faithfully repaid Youth Future Bridge loans, while the KB Smile Foundation will provide loans for young delivery platform workers to purchase motorcycles. Shin said NH NongHyup Financial Group has pledged to contribute at least 100 billion won to establish a Smile Microcredit foundation, adding that all five major financial groups have expressed willingness to contribute a combined 500 billion won. "We will also make full use of private-sector funding," he said.

Authorities have also drawn up financial support measures aimed at making a tangible difference for young people and small-business owners. Starting in December, those with thin credit histories — including youth and foreign nationals — will find it easier to obtain credit cards. Alternative credit scoring will be actively used in card issuance decisions, and a deposit-backed credit card system will also be introduced.

Authorities plan to finalize by December a program to help young people build initial assets through the capital markets. In addition, young people who complete a financial counseling session this month will receive an additional 0.2 percentage point preferential interest rate on Youth Future savings accounts.

The number of banks applying the small-business specialized credit scoring model will expand from seven to 16 in August. The application period for the Fresh Start Fund will be extended through next year, and the eligibility criteria and support levels will be revised this year.

Debtor protection measures will also be strengthened. This month, authorities will push forward a plan to tighten the management of overdue debt held by public financial institutions, with the aim of protecting delinquent borrowers and helping them recover quickly. Long-term delinquent debts of 20 years or more will be written off in bulk, and debts deemed unrecoverable will be subject to a statute of limitations within five years.

Around 1 trillion won in long-term delinquent debt held by securitization SPC such as Sangnoksu will be transferred to a new recovery fund to facilitate swift debt restructuring.

To prevent financial crimes affecting ordinary citizens, such as voice phishing, authorities plan to introduce a no-fault liability regime for financial institutions in voice phishing cases. The Financial Supervisory Service will also establish a special financial crimes police unit dedicated to combating illegal private lending.