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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
Smile Microcredit Logo
Sunshine Loan 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.

Sunshine Loan: A Bright Opportunity for Low Income Earners

 

Sunshine Loan: A bright opportunity for low income earners

 

          The global financial crisis has left many governments around the world with fiscal debt and also severely hit households, particularly  low income earners with growing debt burden. Some of the financial institutions focused more on speculative investments such as project financing and equity investment so far rather than risking by dealing with low income earners. As a result, low income families in Korea heavily rely on private money lenders paying as high interest rate as 44%. On the other hand, the banks started raising interest rate on loans and mortgages due to fears of growing debt.

          The Financial Services Commission (FSC) along with financial institutions*, launched the Sunshine Loan program, which literally means ‘finance like warm sunshine to low income households’.

* The National Credit Union Federation of Korea, the National Agricultural Cooperative Federation, the National Federation of Fisheries Cooperative, the Korean Federation of Community Credit Cooperatives, and mutual savings banks.

A press briefing on the Sunshine Loan by the vice chairman of the FSC, Kwon Hyouk-Se

          On July 20th, there was a press briefing on the Sunshine Loan by the vice chairman of the FSC, Kwon Hyouk-Se. The FSC’s goal was to provide the low-income households with a financial service that can ease their high interest burden from private lending companies and to maximize the number of eligible people to take advantage of the government’s financial services.

          About 10 trillion Korean Won (KRW) will be extended over next 5 years through this program. It is expected to reduce the interest payment burden by 6 trillion KRW over the next 10 years. Interest rates will be differentiated between financial institutions but will be between 10% to 13%. This is significantly low rate considering people with bad credit rating can only get loans from private money lenders with +40% interest.

The differences between the Sunshine Loan and the Smile Microcredit Bank

          People might wonder how the newly-launched Sunshine program differs from the Smile microcredit loan program the FSC already launched last year. The Smile microcredit program is a non-profit loan offered by the Smile microcredit financial foundations . On the other hand, the Sunshine loan is the loan that can be productized by financial institutions following specific guidelines. The purposes loans are quite different between the programs and interest rate would be different as well. Moreover, the eligibility for an individual to get the Sunshine loan is much easier and requires less conditions compared to the Smile microcredit loan. It is expected to provide financial services to much wider range of people. The differences between the Sunshine Loan and the Smile Microcredit Bank.

          In the long term, approximately 17 million people would be potential beneficiaries from the Sunshine loans assuming that the Sunshine loans can cover all those who cannot get microcredit loans or any other loans. The Sunshine Loan can be a bright opportunity for low income households.

Financial Services Commission (FSC) Significantly Lowers Credit Card Commission Rate for Street Market Merchants and Mid-size Retailers

Credit cards have become a daily necessity in today’s credit-based society because they enable customers to buy goods even without cash on hand. Due to their convenience, the amount of credit card payment has steadily increased in Korea. This means that more and more consumers are using credit cards as their means of payment and that stores that do not accept credit cards or charge high commission fees might lose their customers. In Korea, credit card commission rate for street market merchants and mid-size retailers were higher than that of department stores and hypermarkets (A superstore which combines a supermarket and a department store. Examples are Wal-Mart in the US or E-Mart in Korea). As using credit cards in street markets or mid-size retail stores became costly and inconvenient, more and more customers chose shopping in large stores. Consequently, street merchants and smaller retailers, mostly consisted of low income households, lost their customers.

 The Financial Services Commission (FSC), which has been consistently taking measures to help low income households to overcome financial difficulties, has recently announced a policy to lower credit card commission rate of those markets down to about the same level as that of department stores and hypermarkets.

 This credit card commission rate reduction policy covers credit card affiliates in conventional markets, whose yearly revenue is below \96,000,000. Their commission rate are down from 2.0~2.2% to 1.6~1.8%, which is about the same as that of hypermarkets in Seoul (1.6~1.9%). Mid-size retailers, with yearly revenue below \96,000,000, are also beneficiaries from this policy. Their rate has gone down from 3.3~3.6% to 2.0~2.15%. For reference, the commission rate of department stores in Seoul is 2.0~2.4%. And as mid-size retailers’ rate decreased, the rate of small-size retailers, whose yearly revenue is below \48,000,000, also went down from former 2.0~2.3%.

 As a result of this policy, commission rate gap between conventional markets & mid-size retailers and department stores & hypermarkets was almost closed. The FSC expects this policy to save approximately \100,000,000,000 in 2010 and more in years afterwards for street merchants and small retailers. 

 In order to make sure this policy is effectively implemented, the Report Center for Credit Card Affiliates was established on April 1st, 2010, and is now operated by Financial Supervisory Service (FSS). Any noncompliance cases or breaches of this policy can be reported to this center and be properly addressed. Furthermore, FSC is planning a thorough check-up on credit card commission rate operation status in May and June.

Revisions to Insurance Business Supervisory Regulations

Entering the new century, diseases and industrial hazards threatening people’s health and the stability of family income have become various. And as the uncertainty on the security of life increases, people are getting more and more aware of the need for measures in preparation. As a result, more people are buying insurance and the statistics below shows how insurance premium per capita has increased through the year 2000~2006. In fact, insurance has become such a common issue among people these days in Korea, and this can be represented by how often insurance commercials are appearing on televisions. Insurance might seem simple in a sense that paying designated premium regularly guarantees a certain amount of benefit payment in case of an accident. However, considering how complicated insurance products usually are, insurance subscribers can suffer losses unintentionally due to the asymmetry of information. In regard to these potential losses, the Financial Services Commission (FSC) has recently made revisions to supervisory regulations on insurance businesses, which include adoption of cash-flow method and introduction of insurance with no cancellation refund and insurance which charges afterward-commission.

1. Adoption of Cash-flow Method

Formerly, insurance premium was calculated based on a simple numerical formula which horizontally considers just three elements (working expenses, risk ratio, and interest rate, which altogether were called as a three-element method). However, beside these three elements, cash-flow method takes into consideration every element which can influence future cash flows and derives an equation ‘(revenue-expense)/insurance premium’ in which insurance premium is decided at a certain level to meet the profit ratio. In fact, developed countries such as the U.S. and members of EU already adopted this cash-flow method, so this method is now a global trend. The FSC expects this newly adopted method to generate more creative insurance products because insurers now can take more elements than the former three elements into account. This in turn will promote competition between insurance companies, which will lead to lower prices and ultimately bring benefits to consumers.

As the cash-flow method allows insurance companies more discretion in developing insurance products, the FSC has reinforced companies’ duty to notify product details in order to guarantee customers’ right to select insurance products. According to FSC’s guidelines, companies must let customers know premium-to-expense ratio, which show how much of the premium the companies are actually using for their operation expense.

2. Introduction of Insurance Products with no Cancellation Refund

The overall concept for these products is that instead of receiving cancellation refund, customers pay lower insurance premium in the first place. These insurance products will be allowed only for non-investment insurance whose contract periods are less than 20 years. The expected outcomes of the introduction of these products are that customers can be prepared against uncertainties at lower prices (the FSC presumes that insurance premium will be 9.6% lower) and at the same time original role of insurance is enhanced because insurance-staying-customer ratio is increased.

Likewise in adoption of cash-flow method, the FSC came up with guidelines to guarantee customers’ right to select; insurance companies must explain that “these products do not provide cancellation refund” and suggest two options, products with and without cancellation refund, to customers.

3. Introduction of Afterward-commission Insurance Products

Lastly, the modifications in supervisory regulations on insurance business also include allowance for development of afterward-commission insurance products. Beforehand-commission insurance products, which were formerly the only form of insurance, deduct commission from premium before the premium is invested in asset management account. On the other hand, afterward-commission insurance products first invest premium in to asset management account then deduct commission through the insurance period. Because this afterward-commission method deducts less in early stages, investment profit ratio increases thus higher insurance money (lower insurance premium) is expected. FSC estimates approximately 4.5% of profit rate increase (in the fifth year) when applied by afterward-commission method.

These modifications of supervisory regulations on insurance business have been in effect as of April 1, 2010.

How is Corporate-run Smile Microcredit Bank different?

Anyone who has paid attention to what Financial Services Commission is recently doing must have heard about Smile Microcredit Bank, at least the name of it. The overall concept and how it is operated is explained in detail in previous articles and FSC Weekly E-Briefing.

Fin Pol articles on Smile Microcredit Bank

https://fsckorea.wordpress.com/category/fin_ancial-pol_icy-in-korea/smile-microcredit-bank/

Weekly E-Briefing on Smile Microcredit Bank

http://www.youtube.com/watch?v=FAtg6glDyjY&feature=player_embedded

As elaborated in those articles, Smile Micro Credit system is operated by two main bodies, the Smile Microcredit Bank and Corporate-run Microcredit Banks. Smile Microcredit Bank, which is a government subordinate agency, seems quite reasonable in a sense that government always endeavors to come up with better services to promote national welfare. But does it make sense that companies, whose primary goal is known to be making profits, are doing such works? And news articles these days often mention that there are not that many beneficiaries from the Smile Microcredit system. This prejudice and the articles altogether are enough to raise questions among people for the companies’ eligibility for taking part in such system. However, all these questions were answered with just one visit to one of the Company Smile Microcredit branches. Now, through the interview, let’s see what are the real facts and rumors and how Corporate-run Microcredit Bank is actually operated.

 

As for interviewees, Director.Jung Min-Young and Deputy Chief.Kim Ju-Yoel of Woori Smile Microcredit Bank, which is widely known as a successful example of Corporate-run Microcredit Bank, kindly answered questions and gave additional explanations on Corporate-run Microcredit Bank.

Entering the administrative office, Director.Jung Min-Young and Deputy Chief.Kim Ju-Yoel, who had smiley faces, were the first to be seen. Unlike usual bank personnel who are dressed in formal suites with ties, they were wearing casual jumpers, so it gave the impression that their appearance well represented the purpose of Smile Microcredit Bank.

Q: How does Corporate-run Microcredit Bank systematically work?

A: Companies taking part in Smile Microcredit Bank financially support the system in three ways: consolidated funds from insolvent obligation, unclaimed money donation, and specially assigned money from the bank. The first two types of money go to Smile Microcredit Bank to fund regional branches of Smile Microcredit Bank. And the third fund is the money specially set aside for the operation of Corporate-run Microcredit Bank branches. So with the third fund, Corporate-run Microcredit Bank branches provide loans and consulting services. With no financial support or incentives from the government, companies consider those funds as a means of Corporate Social Responsibility (CSR). To give you the exact amount, Woori Bank has assigned for Woori Smile Microcredit Bank 10,000,000,000 won a year for five years, so it is 50,000,000,000 won in total.

As for organizational structure, Corporate-run Microcredit Bank is a totally separate entity from any governmental agencies, so there is no interception or regulations to its operations, which allows companies to run the system with consistency. For example, whether to approve the loan is up to the companies. And because the Corporate-run Microcredit Bank branches are more aware of that region and have more personnel skilled in loans and consulting, they can come up with the most suitable solution for the applicants.

Q: How is Corporate-run Microcredit Bank different from Smile Microcredit Bank?

A: The most significant difference is shown in risk management. There are two kinds of risks. One is the risk in the loan itself, and the other is from management such as the organization itself, human resources management, the flow of tasks, etc. In order to manage the risks in loan itself, Woori Smile Microcredit Bank is mainly composed of Woori Bank personnel, who are experienced in such tasks. As for the managerial risks, Woori Bank’s know-how’s in organizational structure are applied to make the Bank more stable. Therefore we are pretty confident that in those two risk managements we have more competence than Smile Microcredit Bank, whose branches are newly organized.

Q: As expressed in many news articles and other media, there are too many concerns on profit rate or return rate of the loan. According to statistical data in such articles, it is estimated that Smile Microcredit system will inevitably have a deficit soon. Wouldn’t it be a hindrance for the operation of Smile Microcredit Bank?

A: I would first like to say that questioning profit rate in Smile Microcredit Bank is rather absurd. If the companies were concerned with the profit rate at the first place, why would they have started it? Corporate-run Microcredit Banks and normal loan companies should not be compared; they are different from the beginning. While normal loan companies focus on their profit rate on their own perspective, we focus on the borrowers’ profit rate. We try to think in customers’ view. What are the financial difficulties they are going through and how we can advise them in making their business more prosperous are the issues that we try to deal with, not the money. As for the interest rates we set currently, we could have set it 0% if we just considered the original purpose of Smile Microcredit Bank. But the reason why we are not doing so is just that those interest rates are to prevent moral hazards and to partially compensate the cost for Corporate-run Microcredit Banks at the minimum level, so that the money earned from the interest can be used to give loans to other customers. Speaking of the cost, we take every measure to minimize the cost because then we can provide more services to more people with money saved. For instance, to save money for lease, we made Smile Microcredit Bank office and counseling counters in this second floor, which was formerly used for Woori Bank offices. And employees independently hired from Woori Smile Microcredit Bank, work at about 1/4 salary of normal employees.

Q: How are the personnel organized here?

A: Personnel here are either dispatched from Woori Bank’s Low Income Household Support Team, or independently hired from Woori Smile Microcredit Bank. Those who work in Low Income Household Support Team are not only specialized in overall financial matters but also committed in Low Income Household Finance. Among independently hired personnel, there are Woori Bank retirees with long experience in bank. And the rest are also financially well-trained with experiences in similar fields. The pay for those hired from Woori Smile Bank is about 1/4 of that of normal bank employees. Despite the difference in salary, these two groups of personnel have the same compassion for low-income people’s financial difficulties and passion to help them through this Smile Microcredit Bank system. Let me tell you some examples. On the third floor of this building there is a securities business company, and one day a man just came here and said that he wanted \5,000,000. He just thought that Smile Microcredit Bank gives money to the poor. Because he just had lost \10,000,000 in stock exchange, he was mad and would not listen to our explanation on Smile Microcredit. But instead of just driving him out we tried and tried to make him understand, and after four hours of explanation, he was finally persuaded and went back. For another example, sometimes we went out to a nearby conventional market and visited stores to explain Smile Microcredit Bank. As you can see from these examples, we really try to help them, because this bank is not for us, but for them.

Q: So far how many beneficiaries are there from Woori Smile Microcredit Bank?

A: Established in December 17th 2009 as the first Corporate-run Microcredit Bank, we have got 9,114 calls and 1,635 visits for consultation. And among them, 40 customers got Smile Microcredit loans, \3,040,000 in terms of amount. Considering that it has been only three months since the start of this system, this figure is relatively encouraging. And during March, Woori Bank is planning to open two more Woori Smile Microcredit branches in other regions, so the number of beneficiaries is expected to grow. Although the number itself is important in a sense that more people were benefited from the system, we try to focus more on how each beneficiary are getting along with their businesses because the ultimate purpose of Smile Microcredit Bank is to give them a smiles.

Q: Is there anything more to tell us about Smile Microcredit?

A: I know there are many opinions questioning Smile Microcredit system’s success in Korea. But even for Grameen bank, which is considered to be the successful case of Microcredit Bank, it took 20 years until it really made some achievements and thus to be as a successful microcredit model. Also, in financial business field, it takes about 2 years to come up with a descriptive model. Compared to these periods, Smile Microcredit Bank system is now in the beginning stage, so now it is early to discuss its success. Someday later when this system gets more stable in operation, then we can have some discussion. Therefore, for now, please patiently watch us. We are doing our best to give smiles to our customers.

An Update on Smile Microcredit Bank

The Lee Myung-Bak government has launched the “Smile Microcredit Bank,” a state-led microcredit lending program designed to provide unsecured small loans to low-income earners, individual business people and people with under level-7 credit ratings.

A total of 2 trillion won (US$1.78 billion) will be funded over the next 10 years for those who lack access to traditional loans because of their low credit ratings.

* 14 branches funded by the corporate and banking sectors, 7 local branches

The Smile Microcredit Bank lends money at 4-5 percent interest rate, far lower than that of commercial banks, depending on the borrowers’ credit ratings.

 

[Lets look at a case]

The Microcredit Bank is expected to bring a smile to the working class people mired in economic hardships

                               

For example, Ji, Il-Yeol is one of the lucky beneficiaries. The 47-year-old is running an unregistered shop for bedding products in Goyang, Gyeonggi Province, and applied for 5 million won to buy fabric. Woori Bank decided to lend the money to him. Ji, Il-Yeol was so glad to hear that he could get the money. Five million won sounds like a small amount, but for the people who need it is a huge amount.

-“I hope others can also benefit from the program.”- 

 

 

 

[Nation-wide network]

 

All parts of the Korea ! 200 ~ 300 ”Smile Finance” branch. In the new program not only government but also private bank and local government will help this program and make big network across the whole country. This will allow people to easily access the program and make budget supply more diverse.

[Financial consulting]

Moreover, the program will counsel people after they borrow the money on how to spend it effectively.

 

 

[volunteers & Retired Financiers]

The branches will be staffed by young volunteer workers who want to build a financial career and managed by ex-bankers in the financial industry.

As the Smile Microcredit project is still in its early stage, the government will closely monitor the operation and continue to complement the program to benefit more people in need.

For the individuals who cannot benefit from the Smile Microcredit loans due to credit delinquencies, excessive high-interest debts, the government will help them use alternative programs such as the credit recovery program or the loan transfer program.

It is hoped that many people will have a chance to stand on their feet through the help of the smile mircrocredit bank.