ATM machines at major banks in Seoul [Newsis]
ATM machines at major banks in Seoul [Newsis]

South Korea's financial regulator has unveiled the broad outline of a scorecard it will use to evaluate banks' progress on inclusive finance. The Financial Services Commission plans to make the volume of welfare lending — including the Saeheuimang Hollssi low-income loan program — and the adequacy of banks' internal governance structures for advancing inclusive finance the core metrics of the assessment. Regulators are also considering evaluating the decision-making authority granted to dedicated inclusive finance units and the level of relevant expertise on bank boards.

Financial education for consumers, including debt counseling services, will also be a major assessment category. Banks that score highly will be designated "excellent banks" (a working title), a recognition the regulator expects to help boost their brand image.

According to financial industry sources, the FSC shared a draft evaluation table for the comprehensive inclusive finance assessment framework with subcommittee members at the June kickoff meeting of the policy and welfare lending subcommittee of the Inclusive Finance Strategy Task Force. The regulator had announced at the first Inclusive Finance Transformation Conference earlier this year that it would establish such an evaluation framework; the draft is a follow-up to that commitment.

The framework is built around three core indicators.

Welfare lending carries the highest point weighting. Assessments will cover the share of welfare lending products — such as Saeheuimang Hollssi loans and mid-rate loans — within a bank's total household loan balance, along with the volume supplied and the degree of interest rate reductions. Debt restructuring outcomes for vulnerable borrowers, such as the cancellation of delinquent debt, will also factor into the score.

Regulators had considered including support for small and medium-sized enterprises and small business owners as an evaluation category, but dropped that item after the National Assembly began pursuing legislation to promote cooperation between large and small businesses.

Whether a bank has built a governance structure conducive to inclusive finance will also be a core evaluation criterion. Regulators reasoned that sustaining inclusive finance initiatives requires internal decision-making systems to be restructured accordingly.

Under that criterion, assessors will examine whether banks have appointed a chief inclusive finance officer and whether board members with relevant expertise sit on the board. The level of decision-making authority delegated to dedicated inclusive finance departments will also be reviewed.

A bank's inclusive finance strategy itself is another governance metric — covering both the adequacy of the strategy as formulated and how faithfully the bank has carried it out.

Financial education for consumers rounds out the three core indicators. Banks currently provide financial literacy programs for students through one-to-one school partnerships. On top of that, the framework will assess financial counseling services for military personnel and loan borrowers. Regulators are also considering factoring in the rate at which counseling sessions lead clients to government-backed financial products.

Banks that rank at the top of the overall assessment will be designated "excellent banks." Scores will also determine reductions in the contribution rate to the Korea Inclusive Finance Agency. Industry sources said banks have responded enthusiastically, as the designation alone is expected to deliver a strong boost to brand image.

The FSC plans to hold additional subcommittee meetings this month to finalize the framework. A finalized version is expected by the end of July at the earliest, or in August at the latest. "Subcommittee members are offering a wide range of views, so the evaluation indicators could still change considerably," an FSC official said.

Experts caution that inclusive finance performance metrics should not focus solely on volume. "A larger supply of mid-rate loans or welfare lending products does not in itself mean inclusive finance is working," said Kim Yong-gi, head of the Production and Inclusive Finance Research Society. "We also need to look at whether borrowers who were previously shut out of the banking system have re-entered it, whether recovery pathways exist after delinquency, and whether low-credit individuals are genuinely gaining new access to financial services."


hyuk@heraldcorp.com
won@heraldcorp.com