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.

Looking back to the G20 Seoul Summit and forward to the 2011 G20 Summit

         The 2010 G-20 Seoul Summit was the fifth meeting of the G-20 heads of government, to discuss the global financial system and the world economy, which took place in Seoul, South Korea, on November 11-12, 2010. Specifically, the major topics were ensuring global economic recovery, framework for strong, sustainable, and balanced global growth, strengthening the international financial regulatory system, modernizing the international financial institutions, global financial safety nets, development issues and the risk of a currency war.

 

 

 

 

Main accomplishments of G20 Seoul Summit

1. The G20 Seoul Summit has confirmed the 6-percent shift of quota shares to emerging economies in the International Monetary Fund, according to the joint communiqué issued after the end of the summit. The communiqué also said greater representation for emerging economies at the IMF Executive Board through two fewer advanced European chairs, and the possibility of a second alternate for all multi-country constituencies.
2. The G20 leaders agreed on a standstill on trade and investment restrictions to avoid protectionism, and the Korea Initiative, which addresses a global financial safety net and development issues. They also reaffirmed political will for an early settlement of the DDA (Doha Development Agenda), preventing all forms of protectionism and expand trade liberalization in order to promptly bring the DDA to a successful and balanced conclusion.
3. The leaders endorsed the Financial Stability Board’s (FSB) policy framework for reducing the moral hazard of systemically important financial institutions (SIFIs), including the work processes and timelines set out in the report submitted to the Summit. Specifically, G20 leaders agreed to endorse the FSB’s policy recommendations, prepared in consultation with the IMF, on increasing supervisory intensity and effectiveness. They also endorsed its recommendations for implementing OTC derivatives markets reforms, and principles for reducing reliance on external credit ratings.
4. The G20 leaders welcomed the creation of a Flexible Credit Line (FCL) and Precautionary Credit Line (PCL) as new preventative tools to cope with future crisis. Countries with strong fundamentals and policies will have access to a refined FCL with enhanced predictability and effectiveness. Moreover, the PCL will allow countries with sound fundamentals and policies, but moderate vulnerabilities, to benefit from the IMF’s precautionary liquidity provision.
5. G20 Summit used to be an inter-country dialogue; however, G20 Seoul Summit became a premier forum for global economical coordination by adding the private forum for global economical coordination by adding the private channel to it. The business summit in fact introduced a new model where the government and private sector cooperate on a global level.
6. The leaders reiterate their commitments to completing an ambitious replenishment for the concessional lending facilities of the MDBs, especially the International Development Association, to help ensure that LICs have access to sufficient concessional resources.

 

Significance of G20 Seoul Summit

                          Due to the differences in the speed and extent of economic recovery among the G20 member countries, the sense of urgency once they shared has evaporated and spirit of cooperation have been significantly weakened when compared with the time during the 1^st Washington Summit, which was held in 2008. G20 Seoul Summit sure became a turning point for building a new management system for the world economy in the coming future. Especially, the conflict between the U.S. and China over the value of the yuan has been escalating notably and a number of key countries have diverged in their positions on the G20’s core issues, which have given enough burdens for Korea in its efforts to generate fruitful outcomes from the Summit. The G20 Seoul Summit, so far, became a turning point for building a new management system for the world in the coming future. Korea’s effort to the development in the G20 deliberations has been recognized by the world, taking a step forward with leadership. G20 Seoul Summit will become one of most important parts of future summit meetings.

                     2011 is the year of France’s presidency of G20. The goal for this year set by the group’s leaders at last year’s summit in Seoul is to reach agreement in the first half of 2011 on a list of “indicative guidelines” for quantifying imbalances to prevent a repeat of the global economic crisis. In addition, France has more priorities for the year: firstly, to agree on tougher regulation to curb volatility in food and fuel prices and here come the antagonisms between the nations who produce and export commodities and those who seem to the biggest consumers of commodities. Secondly, to negotiate the inclusion of China’s yuan in the basket of currencies underpinning the IMF’s Special Drawing Rights. Not only that, development, innovative financing, and employment and social issues are major topics need to be discussed. France has expressed strong willingness to follow in the footsteps of Korea in hosting the G20 Business Summit.

JiMin Park (parkjm0718@naver.com)