The Korean government seems eager to play Santa Claus for low-income, low-credit people, rolling out a series of programs aimed at providing cheaper loans to them.

But it requires much more than just good intensions to establish a sustainable support system for the “underbanked” population, while not disturbing market order, experts said Tuesday.

“Since the global financial crisis, the economy is recovering rapidly, but many ordinary Koreans are yet to feel the warmth of it,” said Chin Dong-soo, chairman of the Financial Services Commission, celebrating the launch on Monday of another financial aid program called “sunshine loans.”

“I hope sunshine loans could help ease some of the economic pains among low-credit and low-income households.”

Under the program, local financial cooperatives and mutual savings banks will provide about 10 trillion won in loans over the next five years to those with credit grades from 6 to the bottom 10.

The interest rates charged will be around 10 percent, although they vary according to the lending institutions.

The program is the latest in a series of financial aid plans that President Lee Myung-bak has introduced for low-income earners. In December the government established Smile Microcredit Foundation, with the aim of providing 2 trillion won in microcredit loans over the next 10 years.

The foundation now extends loans to those with credit ratings of 7 grade or lower at interest of 4.5 percent a year, via its 50 or so branches across the country.

Experts say sunshine loans and other programs should not be carried out in a way of doling out cheap loans to those in need. They should be managed with market principles and discipline to prevent moral hazard among borrowers, make them sustainable on their own and ultimately help the market to function as credit supplier to the low-income earners.

“The real challenge is how to minimize loan defaults and make the business sustainable,” Jung Chan-woo, a researcher at the Korea Institute of Finance said.

With similar state-sponsored or state-supported programs already in place, it is necessary for related organizations to draw a clear line of amongst them so as to avoid overlaps in loan support, he added. 

It would not be ideal to provide loans with rates that are too low, because then the program would become unsustainable.

Currently, smile microcredit loans have interest of just 4.5 percent a year, far lower than 20 percent charged by Grameen Bank of Bangladesh. That is not enough to cover operating costs, not to mention possible loan losses, Park Chang-gyu, professor of ChoongAng University in Seoul points out. Grameen Bank of Bangladesh, an icon of microcredit, won the Noble Prize in 2006.

Lee, who once ran a major conglomerate company and won the presidential election on a pro-business and market-friendly platform, has been rolling out a series of working class-friendly financial polices after a series of political setbacks.

Last week, he blasted non-bank loan companies here called capital firms for charging high interest rates on borrowers, accusing the companies of “loan-sharking” and practicing “social injustice.”

Capital firms charge interest of about 30 percent a year on personal loans.

After the remarks, Chin said that he also thinks 30-percent interest rates are too high and the authority will look into the situation and come up with measures.

An industry official lamented, saying that the interest rates are after all the price of loans, determined by supply and demand. Capital firms target riskier borrowers, charging them higher rates than commercial banks or savings banks. With no deposit base, they have high funding costs too, he said.

Earlier this month, the government lowered the cap on maximum interest rates that loan companies can charge on borrowers to 44 percent from 49 percent a year. It plans to further lower the interest rate cap in the future.

By Lee Sun-young (milaya@heraldm.com)