The Financial Services Commission announced that a revision bill for the Enforcement Decree of the Microfinance Support Act was approved by the government at the cabinet meeting held on April 6.
Under the revised rules, (a) the size of annual microfinance contributions financial companies make to the Korea Inclusive Finance Agency (KINFA) will be expanded to ensure a steady foundation for the supply of microfinance assistance, and (b) a legal foundation will be established enabling the KINFA to provide credit guarantee support for the users of microloan service under the Credit Counseling and Recovery Service (CCRS) program.
Key Revision Details
a) Expanding financial companies’ annual microfinance contribution amounts
Against the backdrop of rising external uncertainties and straining economic conditions, lower-income individuals and vulnerable groups stand at more risk of falling prey to illegal private lending activities, and thus there exists an urgent need to expand the supply of microfinance support. In this regard, the FSC has been seeking to increase the common contribution rate financial companies are subject to when making contributions to the KINFA in relation to the size of their household loans.
This common microfinance contribution rate was set at 0.06 percent for banks and 0.03 percent for nonbanks (insurance, mutual finance, specialized credit finance, and savings banks) in relation to the size of their household loans. This amounted to an annual contribution level of about KRW434.8 billion in total (KRW247.3 billion from banks and KRW187.5 billion from nonbanks).
Under the revised rules, this common microfinance contribution rate will be raised by 0.04 percentage points for banks to 0.1 percent and by 0.015 percentage points for nonbanks to 0.045 percent, which will expand the total amount of annual contributions by about KRW197.3 billion (KRW134.5 billion more from banks and KRW62.8 billion more from nonbanks).
With the availability of additional funding sources for microfinance assistance, there will be greater access to financial services at lower costs for lower-income individuals and vulnerable groups.
b) Establishing a legal foundation for KINFA to provide credit guarantees
Alongside the debt workout assistance, the Credit Counseling and Recovery Service (CCRS) has been operating a microloan program at low interest rates (3 to 4 percent annually) guaranteed by Seoul Guarantee Insurance (SGI) for individuals who are going through a debt workout process. However, due to the prudential management issue at SGI, which is a private financial company, it has remained difficult to actively expand the supply of microloans operated by the CCRS.
In this regard, under the revised rules, the KINFA will be authorized to provide credit guarantees on microloans issued by the CCRS to facilitate an expanded supply of microloan assistance for those who are going through a debt workout process. The availability of credit guarantees from the KINFA in addition to those made available by SGI will help the CCRS to provide low-interest microloans to more individuals.
Based on this, the CCRS plans to significantly expand the supply of microloans by about KRW300 billion annually from KRW120 billion a year previously to KRW420 billion a year. This will help to increase the chances that individuals going through a debt workout process are more likely to complete the program to quickly recover and regain footing financially.
Further Plan
The revised Enforcement Decree of the Microfinance Support Act will take effect on the day of promulgation. The FSC will continue to seek ways to expand the supply of microfinance assistance and lower interest burdens to help improve access to financial services and bring down costs for lower-income individuals and vulnerable groups.
* Please refer to the attached PDF for details.