P2P lending in South Korea faces rising backlash

Written by Kapronasia || March 16 2020

Peer-to-peer lending is one of the fintech segments that most struggles to gain credibility. Next to cryptocurrency, it may be the most susceptible to scams. But it is not only borrowers who are at risk. Lenders can easily get burned when borrowers default. Since many borrowers on P2P lending platforms are those unable to get a loan elsewhere, their credit is typically not optimal.

P2P lending began growing quickly in South Korea about four years ago, offering attractive returns to investors amidst very low interest rates. Some P2P businesses began venturing into risky investments such as real estate project funds, non-performing loans and mortgages. South Korea had 239 P2P lenders in December 2019, up from just 27 four years earlier. Their outstanding loan balance totaled 2.38 trillion won.

In South Korea, delinquency rates have steadily risen to more than 9.3% compared to just 0.42% in 2016, according to the Korea P2P Finance Association. "Simply put, [P2P businesses] lent money to projects or individuals with low credit scores, which leads to high delinquency rates and high risk of losing money,” Kim Sang-bong an economics professor at Hansung University, told Korea Joongang Daily in February.

Worryingly, some of the biggest industry players have the highest delinquency rates. Tera Funding, which has the biggest loan balance among South Korean P2P lenders at 1.4 trillion won ($1.1 billion), had a delinquency rate of almost 17.5% as of late January, up 4.5% over the previous month, according to The Korea Herald. Honest Fund, the No. 2 platform with a loan balance of 770.9 billion won, had a significantly lower delinquency rate at about 6.2%.

Fraud concerns, meanwhile, are mounting. In December, Korea's Financial Services Commission (FSC) asked prosecutors to investigate the P2P firm Pop Funding for possible accounting fraud. Pop Funding reportedly lent money to SMEs using relatively insecure assets for collateral, including cars. Ironically, the company had previously been recognized by the FSC for financial innovation.

For their part, Korean regulators recognize that P2P lending offers a good alternative financing channel for individuals and businesses who may struggle to get a bank loan. Korea ranks credit scores on a scale of 1 to 10, with 1 being the best. Commercial banks often deny loans to anyone with a score worse than 3, which by some estimates could include more than half of Korean adults.

Thus far, the FSC looks intent on regulating P2P lending rather than curbing it - as China has done. In the absence of widespread, large-scale fraud, regulation is more reasonable than elimination. Under a law set to take effect in August - the first in any country focused on P2P lending -  P2P lenders must have minimum capital of 500 million won ($430,000) to receive a license. P2P lenders must also distinguish between their working capital and funds raised through their lending business.