Protecting vulnerable borrowers without distorting market principles

 

A banner advertises a “Sunshine Loan” product in front of a bank in Seoul on Jan. 8. [YONHAP]

 
Inclusive finance, which seeks to improve access to basic financial services for vulnerable groups, has been promoted by governments across the political spectrum. The aim is to reduce inequality and expand economic opportunities for low-income households. Since the global financial crisis, widening income and wealth gaps have made financial exclusion more acute, prompting the Group of 20 and international organizations to emphasize financial inclusion as a policy priority.
 
Such efforts are necessary. Yet poorly designed systems that resemble one-sided welfare measures can backfire. They may encourage risk appetite and weaken borrowers' capacity to stand on their own. According to data from Rep. Lee Yang-soo of the People Power Party, one in three debtors whose delinquency records were erased last year fell back into arrears. Of the 2.87 million people who received credit amnesties, 960,000 — or 33 percent — defaulted again. Repeated amnesty programs, critics argue, have proven ineffective and fostered dependency.
 
Despite these concerns, the Lee Jae Myung administration plans to expand debt relief. By the end of the year, it intends to erase delinquency records for 3.24 million debtors with liabilities under 50 million won, provided they repay outstanding balances. That approach, however, risks penalizing those who consistently meet their obligations, undermining the principle of fairness.
 
Comments from senior officials have raised further concerns. At a Cabinet meeting last week, President Lee described the 15.9 percent interest rates faced by low-income borrowers as “cruel,” adding that lenders could raise rates for creditworthy borrowers to offset lower rates for high-risk borrowers. On Tuesday, Democratic Party floor leader Kim Byung-ki said, “High interest for the poor is paradoxical. The lower the income and the weaker the credit, the higher the rate they must bear, while the wealthy enjoy cheaper borrowing costs.”
 

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Yet interest rates are the price of risk. Lending at higher rates to borrowers with greater credit risk is a basic function of the market. The 15.9 percent rate that Lee called cruel was already supported by government subsidies. For the state-backed "Sunshine Loan," the Korea Inclusive Finance Agency covered defaults on 25.5 percent of loans last year. If there is a policy need to reduce costs further, it would be more consistent with economic principles to increase fiscal subsidies or provide targeted benefits rather than interfere with lending rates.
 
Economics has long taught that governments should avoid direct intervention in market prices, whether for interest rates or agricultural goods. The chorus of comments from both the president and the ruling party floor leader suggests an interventionist tilt that undervalues market principles. Protecting vulnerable borrowers is essential, but doing so without eroding the price mechanism is the only way to sustain both fairness and stability.


This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.