South Korea’s top financial regulator on Sunday unveiled measures to supply mid-range interest rate loans worth 32 trillion won ($28.7 billion) to 2 million borrowers with weak credit ratings by the end of this year.

The policymaking Financial Services Commission plans to advise both conventional and internet-only banks to extend more mid-rate loans to borrowers with low to moderate credit scores like young people and small business owners, who find it difficult to access cheap bank loans due to their poor creditworthiness, and instead resort to high-rate nonbank loans.

“(The FSC) will force local banks to set up action plans to bolster their mid-rate lending programs and publicly announce outcomes on a regular basis,” the FSC said in a statement.

Also, the banks will be pressured to launch more mid-range lending programs to which debtors can transfer their current credit loans at high interest rates of more than 20 percent, it added. 

In general, mid-range interest rate refers to 5-15 percent. Medium and low-credit rating holders have been underserved in the country’s loan market, with their loans having 20 percent interest rate or more, it added. 

The country’s internet-only lenders Kakao Bank and K bank were established in 2016 with the purpose of offering mid-interest-rate products, but their efforts to serve customers with weak credit ratings have fallen short of expectations, the FSC data showed. 

Loans provided to borrowers with credit scores below 4 on a scale of 1 to 10 accounted for 12.1 percent of credit loans offered by the online-based lenders at the end of 2020, falling far short of 24.2 percent -- the average of all banks here. 

The FSC’s latest move to ease interest rate burdens on higher-risk debtors came after the regulator slashed the maximum legal interest rate that private lenders can charge to 20 percent per annum in November last year, which will take effect from July.

However, concerns are mounting that the nation‘s household debt may rise sharply if local banks begin to increase mid-range interest rate lending under the FSC’s monitoring. 

“The envisioned scheme aims to offer necessary funds to those who are in need. From a perspective of ‘inclusive finance,’ we will provide sustainable funding to those with low to moderate credit scores, while closely managing household debt,” said Kwon Dae-young, director general of the FSC‘s financial industry bureau.

By Choi Jae-hee (cjh@heraldcorp.com)