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Differentiating the guaranteed rate : A way to improve the sunshine loan program

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Frame of Image , Fellow at KDI
“ The uniformly high guaranteed rate currently provided by ‘Sunshine Loan’ through non-bank depository institutions does not incentivize the financial institutions to put enough efforts into the preliminary screening or follow-up management. If the policymakers are to enhance the capacity of non-bank depository institutions in dealing with subprime unsecured personal loans (microcredit), they should differentiate the guaranteed rate according to the credit rating, the loan amount, and the number of loan issued to the same person.”
Ⅰ. Introduction
The Sunshine Loan, which was introduced in 2010, is a subprime unsecured personal loan (microcredit) by non-bank depository institutions. Once financial institutions issue Sunshine Loans to the individuals with low income or bad credit, the Korean Credit Guarantee Foundation partially guarantees loans.
* This is the translated version of KDI FOCUS released on June 18, 2014. * This paper expands upon Chapter 5 of Yoonhae Oh, Microcredit Products for Low-Income and Low-Credit people in Korea: Focusing on the Political Products Driven by Financial Inclusion Policy, Policy Research Series, August 2013, Korea Development Institute, 2013.
KDI FOCUS
2
The positive effect of Sunshine Loan is that it eased financial exclusion of those who in the past were typically forced to use private money lenders that charged very high interest rates. Moreover, it was expected that the experience with issuing loans to these borrowers would


Full Text
Title Differentiating the guaranteed rate
Similar Titles
Sub Title

A way to improve the sunshine loan program

Material Type Reports
Author(English)

Oh, Yoonhae

Publisher

Sejong-si:Korea Development Institute

Date 2015-04
Series Title; No KDI Focus / 40
Pages 11
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding KDI; KDI School

Abstract

The uniformly high guaranteed rate currently provided by ‘Sunshine Loan’ through non-bank depository institutions does not incentivize the financial institutions to put enough efforts into the preliminary screening or follow-up management. If the policymakers are to enhance the capacity of non-bank depository institutions in dealing with subprime unsecured personal loans (microcredit), they should differentiate the guaranteed rate according to the credit rating, the loan amount, and the number of loan issued to the same person.

- The application of differentiated guaranteed rates is required to motivate nonbank depository institutions to use relationship banking and to step up their efforts in followup management.

- The guarantee credit default rate of Sunshine Loan is 13.5 percent while the default rate of Smile Microcredit is 6.8 percent, and the default rate of New Hope Loan is 3 percent.
- Currently, nonbank financial institutions lend a large amount of money to the borrower at once before collecting detailed information about the borrower. (The rest omitted)