Korea’s KakaoBank lowers credit score threshold for low- credit borrowers

[Courtesy of KakaoBank]

South Korean online-only banks are taking different approaches to supplying loans to low- and medium-credit borrowers as they seek to meet their respective targets for loan share ratio by the end of this year.

KakaoBank Corp., which has already surpassed last year’s scale in providing loans to low- and medium-credit borrowers, has significantly lowered the threshold for low- and medium-credit borrowers.

According to a disclosure by the Korea Federation of Banks on Sunday, the average credit score for new credit loans issued by KakaoBank in June was 833, the lowest among the three digital banks, which include two others Toss Bank and K-Bank.

In March, the average credit score was 919, the highest among the three banks, down 90 points in three months.

KakaoBank is seemingly to be actively expanding loans to low credit borrowers as its delinquency rate in the first quarter of this year was 0.58 percent, the lowest among the three banks. The bank’s confidence in its proprietary alternative credit assessment model, “KakaoBank Score,” introduced in September last year, is evident.

KakaoBank Score combines non-financial data from 11 institutions, including the Kyobo Book Centre, the largest bookstore chain in Korea, to provide a more sophisticated assessment of creditworthiness.

Under financial regulatory guidelines, internet-only banks must supply a certain percentage of household credit loans to individuals with credit scores below the lower 50 percent (850 points or less according to the Korea Credit Bureau’s standards).

By the end of this year, KakaoBank aims to have 30 percent of its borrowers as low- and medium-credit borrowers, K-Bank 32 percent, and Toss Bank 44 percent. As of the first quarter of this year, KakaoBank’s proportion of low- and medium-credit borrowers was 25.7 percent, K-Bank 23.9 percent, and Toss Bank 42.06 percent.

Toss Bank is already close to achieving its target for the proportion of low- and medium-credit borrowers and is focusing more on soundness management.

The average credit score for Toss Bank’s new credit loans in June was 915, the highest among the three banks. Unlike KakaoBank, the bank’s average credit score in March was the lowest among the three banks at 850, but it increased by over 60 points in three months.

Toss Bank is the only one among the three that does not offer collateral loans, and its delinquency rate in the first quarter was 1.32 percent, the highest among the three banks. An official from Toss Bank explained that the bank “is not raising the loan threshold or adjusting the screening criteria for low- to medium-credit borrowers.”

K-Bank, on the other hand, is focusing on medium-credit borrowers and is excluding high-credit and low-credit borrowers from its credit loan supply. K-Bank has suspended new credit loans for high-credit borrowers with top 50 percent credit scores since July 15 and has not been offering credit loans to borrowers with credit scores below 650 since October last year. K-Bank’s delinquency rate in the first quarter was 0.82 percent.

“We temporarily suspended credit loans for high-credit borrowers to increase the proportion of collateral loans, and the suspension of loans for low-credit borrowers was a measure for sound management,” said a K-Bank official.

K-Bank’s proportion of collateral loans among its loan assets is 20~30 percent, which is lower than KakaoBank’s 40-50 percent. Recently, K-Bank also expanded its collateral loan products by reducing the refinancing loan interest rate for home mortgage loans to the annual 3 percent range.

The total amount of loans supplied to low- to medium-credit borrowers by the three internet-only banks from January to April this year was 2.07 trillion won ($1.63 billion), down 17.5 percent from the same period last year, raising concerns about sluggish loan supply.