South Korea’s Credit Access Struggles Deepen as Debt Collection Revenues Rise
South Korea’s efforts to improve credit access for financially vulnerable consumers are showing signs of strain as banks remain reluctant to support the country’s “excellent private lender/loan company” initiative, while debt collection activity continues to rise alongside mounting consumer delinquencies.
The latest developments add to a broader wave of financial distress and policy debate unfolding across South Korea’s consumer finance market. Recent reporting has highlighted growing political scrutiny of delinquent debt sales, rising pressure on household borrowers, and increased government involvement in distressed debt management.
Under the Financial Services Commission’s “excellent loan company” program, select lenders that meet standards for serving low-credit consumers are permitted to borrow from banks at lower rates with the goal of extending more affordable credit to underserved borrowers. The system was introduced in 2021 after South Korea lowered its legal maximum interest rate, a move designed to protect consumers from excessive borrowing costs while preserving access to regulated lending.
According to SBS Biz, however, the program has failed to gain meaningful traction with banks. As of May 2026, bank borrowing balances for designated loan companies remained near 200 billion KRW, representing only a small fraction of the sector’s overall lending activity.
Industry data cited in the report showed that by the end of 2025, designated loan companies held 3.691 trillion KRW in total loan balances, with only about 5.4% financed through bank borrowing. Outstanding personal credit loans to low-credit borrowers totaled 1.6785 trillion KRW.
Banks Pull Back From Riskier Consumer Lending
The program was intended to create a middle ground between traditional banking and higher-cost lending markets by encouraging regulated lenders to continue serving consumers with weaker credit profiles.
Instead, banks have reportedly remained cautious because of reputational concerns tied to the lending sector. According to the report, some institutions have limited borrowing arrangements with designated lenders or declined to establish new lending relationships altogether.
That reluctance has reshaped lending behavior throughout the industry. Loan companies increasingly favor secured lending backed by collateral rather than unsecured consumer credit products traditionally used by low-credit borrowers. Approximately 60% of loans in the sector are now secured loans, according to industry analyses referenced in the report.
Professor Kim Sang-bong of Hansung University told SBS Biz that many lenders have effectively reduced new lending to higher-risk consumers and are focusing primarily on existing customers with established repayment histories.
The shift comes as South Korean policymakers face growing concern that financially vulnerable consumers could migrate toward unregulated or shadow lending markets if institutional credit continues to tighten.
Debt Collection Revenues Continue to Climb
At the same time, South Korea’s debt collection industry is experiencing significant growth as overdue consumer debt levels increase.
According to Financial Supervisory Service data cited in the report, 22 domestic debt collection companies generated 1.0473 trillion KRW in operating revenue during 2025, an increase of 2.7% from the prior year. Revenue specifically tied to debt collection operations rose 4.5% to 799.1 billion KRW.
The growth reflects rising levels of non-performing loans and an increasing reliance on outsourced collections by banks and finance companies. Financial institutions facing elevated delinquency rates are turning more frequently to credit information companies and third-party collection agencies to manage recovery efforts.
The trend also follows broader developments in South Korea’s distressed debt market. Recent government and political discussions have focused heavily on the handling of long-term delinquent consumer debt, including scrutiny of debt securitization firms and proposals involving state-backed debt restructuring initiatives.
Why It Matters
The latest developments illustrate the difficult balance South Korea faces between consumer protection and maintaining access to regulated credit markets.
Interest rate caps and tighter lending standards were intended to shield borrowers from harmful lending practices. Critics, however, argue that those policies may be unintentionally restricting credit availability for consumers with weaker financial profiles.
The expansion of debt collection activity alongside shrinking unsecured lending volumes suggests financial stress is increasing among segments of South Korea’s consumer population.
