The Current Status of Sunshine Loan Program and Smile Microcredit Program

The disastrous financial crisis that swept the world economy through 2007~2008 had a detrimental effect on household economy,especially on households with low or middle income level. It became increasingly difficult to get a loan from financial firms that tightened up to stabilize their financial status. The walls for loan getting higher day by day, slowdown in consumption was evident.

The Korean government carried out set of measures aimed at alleviating the situation. It introduced various finance programs including Sunshine Loan and Smile Microcredit. This edition is intended to give a comprehensive analysis of the two finance programs Sunshine Loan and Smile Microcredit through two separate articles that explains and analyzes ①the characteristics and current status of the programs and ②the government’s amendment plans for the programs.

Smile Microcredit Logo

Sunshine Loan Logo

The Sunshine Loan program was initiated in July, 2010. The numerical goal of the program was, for five years, to form a 2,000-billion-won guarantee fund jointly – the government with financial firms – and to lend out 1 trillion won to people at the interest rate of 11~14%. Since the beginning of the program to the end of this year’s June, total of 283.1 billion won had been formed as the guarantee fund. The source of the fund includes central government, local governments and financial firms (Nonghyup, Suhyup, Saemaeul Bank, Shinhyup and Savings Banks). A total of 183,144 people were provided with 1700 billion won of loan. Also,
big proportion of the people benefiting from this program is of credit levels 6 and 7 (These people make up 58 percent of the total loan).

The increase in amount of loans taken out is slowing down after a sharp increase in early phase of the program as the evaluation for redemption ability became stricter (October, 2010). The daily average amount of loan was 21.2 billion won between
July, 2010 and September, 2010 while it was 3.6 billion won between October, 2010 and June, 2011. If this trend were to continue, about 1750 billion won will be lent out, meaning that the actual amount of loan will fall behind the annual goal of 2000 billion won. It would be necessary to arrange plans to invigorate loan take-outs and call for collaboration between offices.

Smile Microcredit program is a quite different program. Its goal is to provide people with chances to get a loan for establishing business. For 10 years, 2200 billion won will be raised from donations and dormant deposits to lend out loans with the interest rate of 2~4.5%. Smile Microcredit program is carried out in various places including companies, banks and local foundations. At the end of June, 2011, a total of 1,000 million won had been gathered. Since January, 2010 –the month this program was initiated- until June, 2011, a total of 263.5 billion won had been lent to 28,728 people. Similar to Sunshine Loan program, people of relatively low credit levels were main beneficiaries of this program. 62.5% of the people who took out loan with the help of the program were of credit levels 7 and 8. Having witnessed 148.1 billion won being lent in the first half of the year, it is estimated this year that the actual amount of loan will outrun the annual goal, which is 200 billion won. The default rate is stagnant near the number 2.5 but is expected to increase.

The program has been successful in that people could have widened chances of getting loans. Cases of successful establishment are being reported. Yet, the fact that collective measures between the local community and loan program were not sufficient needs amendment. Also, as the main purpose of the program is to help people establish a concrete economic basis (i.e. business or ventures), there needs to be additional measures – such as business consulting – to facilitate the program in Korean society.

In the next article, there will be detailed accounts of the government’s plans for efficiently operating Sunshine Loan program and Smile Microcredit program.

The Current Status of Korean Household debt and the Government’s Plan

 

                                                                                                                            (Photo = Yonhap News)

People are well aware of the nightmarish crisis that had swept the world economy a few years ago. The global financial crisis 2007-2008 led to bankruptcy of giant financial firms and also devastated the economy of many countries. What is notable about the global financial crisis is that the primary cause of the catastrophic event was the unsound mortgage loans taken out by households. As witnessed in the global financial crisis, household debt can end up causing detrimental effects on the economy.

There have been constant worries about the rapid increase of Korean household debts. According to reports by a multiple number of press or research centers, the amount of household debt is snowballing dangerously and Korea’s overall amount of household debt is relatively large compared to the size of Korean economy.

However, the claim of some people, that the status of household debt is pessimistic, has yet to be proven right. It is true that the amount of household loans had increased sharply in the past but the pace has been slowing down since 2009. The relative size of household debt to the size of Korean economy is certainly large but considering various indicators for soundness of debts, the status of household debt is stable.

Countries (2009)	Korea	US	UK	Japan	OECD Avg.
Household Debt / GDP (%)	80	97	103	69	69
Household Debt / Disposable Income (%)	143	126	168	112 (08’)	123

                                                                                                          (Chart = FSC document, 21^st Tele-conference for Global Investors)

The default rates of household loan and house mortgage loan are 0.68% and 0.58% respectively (Sept. 10). The rates are significantly low noting that the default rate for mortgage loan in US is 9.9%. Korea’s loan-to-value ratio (LTV) is also low compared to other major countries. The LTV of Korea is 47.1% while that of US and UK is 74.9% (July 9) and 85.2% (Dec. 7) respectively. Another notable factor is the ratio of high income earners in the loan market. The ratio of high income households to household borrowers is high. Four to five classes in the upper part of 10-division-income-level chart make up a total of 64 percent of Korean household debt.

Despite the fact that the current status of household debt is not so worrisome, the Korean government is keeping a close eye on it. The government is aware that unstable household debt might work as a potential risk factor, and will put efforts in successfully managing the household debt level. To attain the goal, the government launched a task force that consists of private experts and government officials. The task force will regularly hold meetings. The main agendas are as follows: ①Management of size and increase rate of household debt, ②Plans to strengthen debt redemption capability of households, ③Measures to reinforce the soundness of household loans, ④ Plans of financial aids for financially vulnerable class.

The government, especially the FSC, has selected the stable management of household debt as this year’s main task and is planning a set of measures aimed at controlling household debt.