It was supposed to be a bold answer to a stubborn problem: how to help South Korea's most financially vulnerable citizens access credit without plunging them into the hands of predatory lenders. Yet, five years after the Financial Services Commission (FSC) rolled out its 'excellent loan company' system, the program remains stuck in neutral, with the very people it aimed to help increasingly left on the sidelines.
According to SBS Biz, as of May 17, 2026, the bank borrowing balance of these so-called excellent loan companies has stagnated at around 200 billion KRW—a figure that underscores just how little traction the initiative has gained. For context, by the end of 2025, these companies had a total loan balance of 3.691 trillion KRW, but only about 5.4% of that was financed through bank borrowing. The outstanding personal credit loans for low-credit borrowers stood at 1.6785 trillion KRW, representing roughly 11.9% of the total.
The excellent loan company system was introduced in 2021, a year that saw the legal maximum interest rate lowered in an effort to protect ordinary citizens from excessive borrowing costs. With mounting concerns that this change would squeeze out low-credit borrowers from the formal financial system, the FSC stepped in. Its solution was to allow select loan companies—those meeting strict criteria, such as a low-credit borrower loan ratio over 70% or more than 10 billion KRW in outstanding low-credit personal credit loans—to borrow directly from banks at lower interest rates. The hope was that these companies could then offer more affordable, mid-interest rate loans to people who needed them most.
On paper, the system looked promising. As of the first half of 2026, 23 companies had earned the 'excellent' designation, granting them access to cheaper bank funds. But in reality, banks have been hesitant to fully embrace the program. According to SBS Biz, many banks remain wary of reputational risks associated with supporting loan companies, a sector that still carries a social stigma in South Korea. As a result, banks have limited their exposure, allowing only small-scale borrowing or, in some cases, declining to enter new lending relationships altogether.
This reluctance has had ripple effects throughout the industry. Loan companies, faced with tighter margins and concerns about maintaining their own financial health, have shifted their focus away from unsecured credit loans—those most vital to low-credit borrowers—and toward secured loans backed by collateral. It's a notable trend: about 60% of all loans in the sector are now secured, according to industry analyses cited by SBS Biz.
Professor Kim Sang-bong of Hansung University, speaking to SBS Biz, painted a stark picture of the current landscape. "Loan companies have practically stopped new loans to low-credit borrowers and operate mainly for existing faithful customers," he explained. "Ultimately, the most vulnerable are being pushed out of institutional finance."
For many, this means that the very safety net intended to catch them is now riddled with holes. As loan companies tighten their standards and banks remain on the sidelines, low-credit borrowers—often those already struggling with job insecurity or medical bills—are left with few options. The risk is that they may turn to the shadow banking sector, where interest rates and collection practices can be far harsher.
Meanwhile, another segment of the financial industry is experiencing what some are calling a 'recession-type boom.' The debt collection sector, which handles the recovery of non-performing loans for banks and other financial institutions, is thriving as more Koreans fall behind on their payments. According to the Financial Supervisory Service, there were 22 domestic debt collection companies operating in 2025. Their operating revenue reached 1.0473 trillion KRW that year, marking a 27.8 billion KRW (2.7%) increase from the previous year. Within that, revenue from debt collection business specifically jumped by 34.7 billion KRW (4.5%) to 799.1 billion KRW.
This uptick is no accident. As banks and other formal lenders grapple with a rise in overdue loans—typically those unpaid for more than three months—they have increasingly outsourced collection to credit information companies. Loan companies, too, are ramping up their use of external agencies, driven by the high costs and complexities of in-house debt recovery. It's a trend that reflects broader economic anxieties: while some sectors struggle, others profit from the fallout.
For the individuals caught in this web, the stakes couldn't be higher. The promise of accessible, affordable credit is slipping further out of reach, just as household budgets are stretched ever tighter. The rise in debt collection activity is a symptom of deeper financial distress, one that threatens to widen the gap between those with access to mainstream banking and those left to fend for themselves.
What's behind banks' persistent reluctance? For many, it's a matter of image. Supporting loan companies—even those designated as 'excellent' by regulators—still carries a whiff of risk in the eyes of the public and shareholders. There's a fear that any association with the high-interest lending sector could spark criticism or erode trust, particularly in a country where financial scandals have made headlines in the past.
Yet some experts argue that a more nuanced approach is needed. The original intent of the excellent loan company system was to bridge the gap between traditional banks and marginalized borrowers, offering a path to financial inclusion. Without greater participation from banks, that bridge remains incomplete. As Professor Kim noted, "The structure is such that the most vulnerable are being pushed out of institutional finance."
For policymakers, the challenge is clear: how to balance the need for risk management and reputational safeguards with the urgent imperative to support those most at risk of financial exclusion. Some suggest that additional incentives or guarantees could help nudge banks toward more active participation. Others call for a public education campaign to destigmatize responsible lending to low-credit borrowers, emphasizing the social value of financial inclusion.
In the meantime, the numbers tell a sobering story. Despite the best efforts of regulators and reformers, the excellent loan company system has yet to deliver on its promise. With only a fraction of total loans supported by bank borrowing, and a growing reliance on secured lending, the sector appears to be moving further away from its original mission. The debt collection boom, while lucrative for some, is a stark reminder of the human cost of financial exclusion.
As South Korea navigates these crosscurrents, one thing is certain: the need for creative, compassionate solutions has never been greater. The question is whether banks, regulators, and loan companies can find common ground before more vulnerable borrowers slip through the cracks.