South Korea's Financial Polarization Under Fire: Official Calls for Systemic Reform

A recent online post by Kim Yong-beom, a senior official at the Presidential Office, has sent ripples through South Korea's financial industry, igniting a crucial debate about "financial polarization." Kim's critique, framed as a "statement of reflection," argues that the nation's financial system has, over the past three decades, actively widened the gap between the rich and the poor, effectively excluding a significant portion of the population from essential financial services.

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The financial system has, over the past 30 years since the foreign exchange crisis, expanded the polarization of assets and, in the process, has functioned to exclude people who need finance.

This perspective, as reported by the Hankyoreh, highlights a fundamental disconnect between the intended purpose of finance – to support productive activities and future potential – and its actual practice. The article points to the banking sector's heavy reliance on mortgage lending, which has disproportionately benefited asset holders and fueled property price inflation, while neglecting the crucial role of mid-rate loans for fostering new ventures and supporting small businesses. This has left millions of individuals with low to mid-level credit scores underserved by both institutional finance and welfare-oriented policy loans.

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The original function of finance is to help productive activities and to help future possibilities, but for decades, it has been deviating from that role.

Financial authorities acknowledge the gravity of the situation, with one official stating the need to overhaul credit assessment systems to prevent "interest rate stratification" and urging financial companies to adapt their practices. The challenge lies in expanding financial access for the estimated 5 million individuals in the lower 20-30% credit bracket. This requires banks to play a more proactive role and for credit scoring to evolve beyond traditional metrics, potentially incorporating factors like online activity and payment history, as suggested by experts.

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The problem of interest rate polarization is worsening, making it difficult for mid-credit borrowers to get loans from banks, and the problem of self-employed individuals is growing.

However, the path forward is not without its complexities. Some within the financial sector express reservations, citing a lack of readily available data to accurately assess future repayment capabilities for these individuals. Others argue that the perceived "gap" in lending isn't a result of avoidance but rather a reflection of inherent risk and capital requirements associated with managing loans in the middle-credit segment. From a South Korean viewpoint, this debate is critical. It forces a reckoning with how our financial system, often lauded for its efficiency, has inadvertently created barriers for many. The Hankyoreh frames this as a necessary correction, urging a return to finance's core function: empowering individuals and fostering genuine economic growth, not just asset accumulation.

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Risks change continuously, but losses do not. There are clearly segments where the loss rate jumps non-linearly beyond a certain point.