Last year's contributions hit record 439.6 billion won, up 91.5% in 3 years

Subrogation rate for lowest-credit borrowers reaches 33.7%, with banks covering half

Contribution rates also raised amid calls to tackle bad debt first

ATM machines at major banks in Seoul. [Yonhap]
ATM machines at major banks in Seoul. [Yonhap]

As bad debt in government-backed lending programs for low-income borrowers grows, the financial burden on the institutions that fund them is mounting rapidly. Financial companies paid nearly 1.5 trillion won ($1.09 billion) into policy lending programs over the past four and a half years, with last year's contributions nearly double the 2022 level.

According to data submitted to People Power Party lawmaker Park Sung-hoon of the National Assembly's Political Affairs Committee by the Korea Inclusive Finance Agency, financial companies paid a combined 1.48 trillion won in contributions to the low-income lending fund from 2022 through June this year.

The burden on the financial sector grew particularly steep last year. Annual contributions rose from 229.6 billion won in 2022 to 274.1 billion won in 2023 and 302.8 billion won in 2024, then jumped to 439.6 billion won last year — a 91.5 percent increase in three years and the highest on record. Contributions in just the first half of this year have already reached 239.3 billion won.

The surge reflects both an expansion in policy lending supply and a rise in default risk. The combined disbursement of programs including Haetsal Loan Bank, Workers' Haetsal Loan, Haetsal Loan 15 and the special guarantee for the lowest-credit borrowers grew 24.2 percent, from 5.16 trillion won in 2022 to 6.41 trillion won last year. That increase is far outpaced by the 91.5 percent rise in financial sector contributions over the same period.

Default rates on guaranteed products are also significant. As of the end of June, the subrogation rate — the share of loans repaid by the guarantee agency on behalf of borrowers — stood at 33.7 percent for the lowest-credit borrower special guarantee program. The rate was 29.0 percent for Haetsal Loan 15, 22.9 percent for Haetsal Loan Card and 18.7 percent for Haetsal Loan Bank.

When subrogation rates rise, the amounts that guarantee agencies must repay to financial companies on behalf of borrowers increase. Because a portion of contributions is assessed on a differentiated basis reflecting subrogation performance, the structure means that as defaults grow, so does the financial sector's burden.

An ATM installed on a street in Seoul. [Yonhap]
An ATM installed on a street in Seoul. [Yonhap]

On top of rising default rates, contribution rates themselves were raised this year. A revision to enforcement regulations took effect in April, lifting the common contribution rate applied to outstanding household loan balances from 0.06 percent to 0.1 percent for banks, and from 0.03 percent to 0.045 percent for non-bank institutions.

Banks bear roughly half the total burden. From 2022 through the first half of this year, banks paid 709.9 billion won in contributions, accounting for 48.0 percent of the total. Mutual finance cooperatives contributed 380.7 billion won, savings banks 211 billion won, insurers 100 billion won and specialized credit finance companies 83.9 billion won.

Bank contributions rose gradually from 107.8 billion won in 2022 to 129.1 billion won in 2024, then jumped 67.5 percent to 216.2 billion won last year. Banks paid another 138.4 billion won in just the first half of this year.

Among individual banks, KB Kookmin Bank led cumulative contributions at 115.1 billion won, followed by Shinhan Bank at 95.8 billion won, NH NongHyup Bank at 84.9 billion won, Jeonbuk Bank at 75.1 billion won, Hana Bank at 74.5 billion won and Woori Bank at 64.4 billion won.

Internet-only banks also saw a sharp rise in contributions. On a cumulative basis, Kakao Bank paid 38.3 billion won, Toss Bank 23.4 billion won and K bank 13.9 billion won. Kakao Bank's annual contribution more than tripled from 4.1 billion won in 2022 to 13.2 billion won last year, while Toss Bank's surged more than twelvefold from 800 million won to 9.7 billion won over the same period.

"There can be no disagreement about the need to strengthen the financial safety net for low-income and vulnerable groups," Park said. "But we need to ask whether it is a sustainable solution to keep collecting more money from financial companies every time bad debt grows."

He added that rising costs for financial companies could ultimately be passed on to consumers, and urged the government to strengthen bad-debt management in policy lending programs rather than relying solely on expanding contributions.

Meanwhile, the National Assembly is discussing plans to consolidate contributions from financial companies and the government into a statutory fund called the Low-Income Financial Stability Fund, and to extend the period during which financial companies are required to contribute. The current contribution rules are set to expire on Oct. 8, but bills have been introduced to extend the deadline to 2031 or to remove the expiration date entirely. Lawmakers are also considering raising the legal guarantee multiplier cap from 15 times to 20 times to expand the capacity of policy lending programs.


rim@heraldcorp.com