Gov't reviews credit scoring system to widen access for low-credit borrowers

A signboard lists personal and small business loans, along with other banking services, at a bank in Seoul, April 28. Yonhap

The government is reviewing possible changes to the credit scoring system aimed at expanding access to financing for low- and middle-credit borrowers, according to the Financial Services Commission (FSC) on Thursday.

The financial regulator said discussions are underway as part of broader efforts to strengthen the Lee Jae Myung administration's inclusive finance agenda.

"We are discussing various measures to promote inclusive finance in a broader sense. The focus is on improving long-standing practices in the lending market toward a more inclusive direction," an FSC official said, noting that no concrete measures have been decided yet.

The review comes a day after the president questioned whether regulators were relying too heavily on the voluntary efforts of financial institutions to support lower-credit borrowers.

"Is there no way to evaluate how much inclusive financing lenders have provided to middle- and low-credit borrowers and impose disadvantages if they fall short of expectations?” Lee asked FSC Chairman Lee Eog-weon during a Cabinet meeting.

Saying the current system relies too much on the "goodwill" of financial institutions, the president also asked whether the FSC could introduce regulatory guidelines requiring banks to expand lending beyond high-credit borrowers to those with lower credit ratings.

Following Lee's remarks, authorities are expected to explore alternative credit assessment systems that could complement conventional models, which are largely based on borrowers' annual income and repayment histories.

Officials believe more inclusive assessment models are needed to better evaluate so-called "thin filers" who lack sufficient financial records, such as young people and unpaid homemakers.

The government's push to overhaul the credit scoring system, however, has raised concerns among experts and industry officials that excessive intervention could undermine the principles of risk-based lending.

"Loan markets operate on the principles of supply and demand, with interest rates determined by credit risk. Excessive government intervention could distort the market," said Kim Dae-jong, a business administration professor at Sejong University.

"Protecting vulnerable borrowers is important. But any changes to the credit evaluation system should come after sufficient consultation with financial institutions," he added.

Alternative credit scoring models using nonfinancial data are increasingly being viewed as a possible way to better assess borrowers who fall outside conventional credit evaluation systems.

Some internet-only banks have already adopted such models to evaluate customers with limited financial histories.

For instance, KakaoBank said its proprietary credit scoring system, which uses nonfinancial data such as telecommunication bill payments and online transaction records, has been used to extend a cumulative 1.1 trillion won ($757 million) in loans to middle- and low-credit borrowers.

According to company data released Wednesday, the internet-only lender supplied 450 billion won in middle- and low-credit loans in the first quarter, while more than half of borrowers who received such loans saw improvements in their credit scores.