

Calls grow for elaborate credit scoring system for expats



By Park Jae-hyuk



Korean banks remain reluctant to lend to foreign residents without collateral, despite more non-Korean customers at local banks, according to the latest data compiled by several institutions.



The banks' attitude to such lending is in stark contrast to their recent efforts to attract more foreign customers.



Over the past few years, local banks have introduced financial services tailored to expatriates, as the number of foreign residents in Korea surpassed 2.3 million at the end of 2018.



But citing the risk of default and difficulties in credit scoring, the banks have avoided providing foreigners with loans ― especially unsecured ones ― and focused more on helping them use other services such as remittance, savings and insurance.



According to Korea Credit Information Services (KCIS), 61,000 foreigners borrowed money from local financial firms in 2017 ― 0.3 percent of total borrowers in Korea. The agency is yet to disclose 2018 statistics.



The outstanding balance of foreigners' loans was 4.7 trillion won ($3.9 billion), which was also 0.3 percent of the nation's total loan balance.



Of the amount, secured loans, including home-backed loans, accounted for 87.4 percent. Unsecured loans, including personal loans and credit card loans, made up 12.6 percent.



For Koreans, unsecured loans accounted for 23.9 percent of the nation's loan balance.



"Home-backed loans occupy a large proportion of foreigner loans, because there is less information about foreigners' identities and a huge risk of the borrower leaving Korea without notification," KCIS researcher Baik Cheol said.



"Financial institutions have therefore offered limited services such as asset management and remittance."



Foreign customers of the country's five major banks ― Shinhan, KB Kookmin, Woori, KEB Hana and Nonghyup ― exceeded 5.3 million at the end of 2018, showing an average annual growth rate of 15.2 percent since 2015.



With an expectation of continuous growth in the number of foreign customers, local banks have introduced branches and mobile banking apps tailored to them. But few deal with services regarding unsecured loans for their foreign customers.



Furthermore, some banks reportedly ordered their branches to reject applications from foreigners who want to borrow money without collateral.



"Even if we check foreign customers' transaction histories, we may face difficulties in collecting loans if they return to their home country without notification," a bank official who requested anonymity said.



The official also pointed to the lack of a credit-scoring system for foreigners.



Banks granting unsecured loans



While most banks avoid lending money to foreign customers, KEB Hana, Shinhan and Jeonbuk banks have been aggressively promoting unsecured loans for them.



KEB Hana, which introduced the nation's first unsecured loan product for foreigners in 2013, still has this service ― the "Preferential Loan for Foreigners." It allows them to borrow up to 30 million won.



Shinhan introduced a foreigner-only housing loan product for "jeonse" payments in 2017.



Jeonse, also known as a key money deposit, is a real estate practice unique to Korea in leasing apartments. The renter pays the landlord a large sum of money as a deposit instead of paying monthly rent.



According to the bank, foreign tenants can borrow up to 200 million won if they sign housing lease agreements through real estate agents, paying at least 5 percent of the lease deposit.



Jeonbuk, a provincial bank based in North Jeolla Province, introduced a loan product in 2018 for foreign workers holding E-9 non-professional employment visas. This allows foreign workers to borrow up to 10 million won.



Credit-scoring system for expats



Analysts say foreigners' demands for loans will continue to rise in Korea.



"Most foreign residents here conduct various financial transactions just like Koreans, so the size of the loan market for them may grow further," Baik said. "As most of them are stably participating in economic activities, the demand for loans seems to be high."



Hana Institute of Finance researcher Lee Jong-soo also expected growth in the loan market for foreigners, citing the increase in the number of high-income foreigners owning their own houses.



For banks to satisfy the demand, analysts called for an elaborate credit-scoring system for foreigners.



Shinhan Card said in January it had done just that.



According to the card firm, the system uses foreign borrowers' non-financial data in addition to their transaction histories.



Given that most foreigners have faced difficulties in borrowing money from banks, due to their lack of transaction records in Korea, market observers expect the new system will help banks grant more unsecured loans to foreigners.

