Despite various aid programs sponsored by the government and public institutions and microcredit facilities operated by NGOs, discrimiatory credit practices by regulated financial institutions against small neighborhood businesses (SNBs) and low-income households (LIHs) still prevail in the financial markets, and one of the major policy goals of financial authorities is to expand credit supply to SNBs and LIHs.
Key to such policy should be to revitalize small financial instituitions specializing in subprime lending (thrifts). Current policies, however, focus mainly on expanding direct supply of credit by public institutions and government guarantees granted to individual borrowers with poor credit rating. Those programs deteriorating credit practices in the subprime lending market even further not only by discouraging private financial institutions' efforts to cultivate competent credit practices but also by carnivalizing on the customer base of thrifts. We propose a more market-friendly guarantee mechanism that actively utilizes screening functions of thrifts. In this mechanism, the government randomly chooses part of the subprime loan portfolio of a thrift, and grants guarantee to the selected loans. This mechanism allows less room for moral hazard and adverse selection, and provides incentives for thrifts to improve internal screening procedures. We analyze pros and cons of such mechanism and provide detailed discussions on key considerations to enhance operating efficiency of the mechanism.
금융소외 해소를 위한 정책서민금융 개선방안(Policy reform to improve credit availability to small neighborhood businesses and low-income households)
|Series Title; No||정책조사보고서 / 2010-01|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||한국금융연구원; KDI 국제정책대학원|