Top P2P lenders for low-credit borrowers to get doubled self-investment cap

South Korea's financial regulator plans to steer the online peer-to-peer lending industry away from its heavy reliance on real estate-backed loans and stock-collateral loans, pushing it instead toward unsecured credit lending for mid- to low-credit borrowers. Starting in March next year, platforms that excel at lending to such borrowers and demonstrate strong credit-assessment capabilities will see their self-investment cap doubled — from 20% to 40% of funds raised — while the linked-investment limit for a single financial institution will rise from 40% to 50%. The overall investment ceiling for general retail investors across the P2P sector will also increase from 40 million won ($28,900) to 50 million won.

The Financial Services Commission announced the measures Tuesday after holding an industry roundtable on expanding capital supply to mid- to low-credit borrowers through the online P2P lending sector.

The overhaul aims to reduce the sector's skew toward collateral-backed lending and restore its original purpose: providing mid-rate credit loans to borrowers with mid- to low-credit scores. As of the end of last year, real estate-backed loans accounted for 40.5% of total P2P lending and stock-collateral loans for 33.3%. By contrast, unsecured credit loans averaged just 11.6% of the total over the past five years, and mid- to low-credit borrowers made up only 63.1% of individual credit loan recipients — well below the shares at savings banks (99.7%), credit finance companies (99.6%) and insurers (95.3%).

In response, the FSC will introduce a new "top P2P lender for mid- to low-credit borrowers" designation. To qualify, a platform must have a track record of personal and sole-proprietor credit lending over the past three years, and must have recorded at least one fiscal year in which mid- to low-credit borrowers accounted for 60 percent or more of its loan portfolio, or in which the outstanding balance reached at least 30 billion won. Platforms must also operate a proprietary alternative credit-scoring model with dedicated staff, keep the average interest rate on personal credit loans at or below 15 percent per annum, maintain equity capital of at least 1 billion won, and hold the delinquency rate on personal credit loans below 5 percent.

Qualifying platforms will receive relaxed investment regulations, but only for credit loans to mid- to low-credit individual and sole-proprietor borrowers. The self-investment cap will rise from 20 percent to 40 percent of funds raised, and the linked-investment limit for a single financial institution will increase from 40 percent to 50 percent. For example, on a 12 million won loan, the P2P platform could invest up to 4.8 million won of its own funds, while a single financial institution partner could contribute up to 6 million won.

The overall investment ceiling for general retail investors in the P2P sector will also rise from 40 million won to 50 million won. However, the 20 million won cap on real estate-backed loan investments and the 5 million won cap per individual borrower will remain unchanged. The FSC also plans to allow small-sum diversified investing, under which retail investors can spread funds across multiple personal and sole-proprietor credit loans.

The FSC will also broaden the scope of linked investment by financial institutions. Currently permitted mainly for savings banks and select regional agricultural cooperatives, linked investment will be extended to the broader mutual finance sector, and the eligible loan types will expand from personal credit loans to sole-proprietor credit loans as well. As of the end of July, 23 savings banks participating in linked investment had made cumulative investments totaling 508 billion won.

The loan maturity extension process will also be streamlined. Under the current system, a borrower must fully repay an existing loan before the platform can recruit new investors. Going forward, if existing investors consent, the system will allow maturity extensions within the scope of their original investment amounts. If some investors withdraw, only the shortfall will need to be raised from new investors.

To expand lending to small business owners, the FSC will pursue system integration that allows P2P platforms to use a dedicated small-business credit-scoring model drawing on non-financial data such as sales figures, industry type and commercial district information.

Investor protection measures will also be tightened. External verification will be introduced for key operational disclosures — including delinquency rates on linked loans and sales of non-performing assets — and platforms will be required to publish a loss rate alongside the existing delinquency rate to give investors a clearer picture of actual losses. A legal basis for the administrative cancellation of registrations will also be established to facilitate the orderly exit of failing platforms.

FSC Vice Chairman Kwon Dae-young called on the industry to reflect on the fundamental question of why P2P lending was introduced in the first place, and to consider a new role that sets it apart from traditional financial institutions. "I ask that you take responsibility as innovative finance providers that give mid- to low-credit borrowers and the self-employed a foothold for recovery and an opportunity for growth," he said.

The FSC is targeting a March implementation for the top-lender designation, the expansion of financial institution linked investment, and the higher retail investor ceiling. The upgraded maturity extension system is set to launch in April next year.

Meanwhile, P2P personal credit lending has grown rapidly this year. According to the P2P Center, the outstanding balance of personal credit loans at 46 domestic platforms stood at 610 billion won at the end of last month — more than four times the 137.3 billion won recorded at the end of last year.