How would you describe the current economy in South Korea, in particular to the banking and finance sector?

The overall trend in the first half year of 2008 has shown that economic growth which used to be on upward curve last year has come to an end. Amid the steady export increase, economic growth has slowed down due to shrinking domestic demand in consumption and investment. On top of that, price increase in raw materials including oil and a substantial current account deficit have become heavy burdens for the Korean economy.

Just when the international financial market has started to stabilize after Bear Stearns bail-out, two major US mortgage companies Fannie Mae and Freddie Mac are now suffering from massive non-performing debts that illustrate a gloomy picture again. As such, the Korean financial market which relies significantly on the US market may need to get prepared for the unexpected future.

As for the local SME lending market, the loan delinquency rate is on the rise given the high oil price and economic recession. When looking at the trend of delinquency rate from end of 2007 to this first half year, there is a slight decrease and tends to be stable for large corporate and retail lending. On the other hand, the SME lending has recorded an increase of 0.5% across manufacturing and non-manufacturing sectors.

While the service sector is comprised of mostly micro-sized self-employed traders, the delinquency rate in sub-sectors such as accommodation, retail/wholesale or real-estate business do not seem to be very optimistic. Although the Financial Supervisory Service expects that local banks with good asset quality are capable of absorbing the loss from bad SME loans, it is imperative for financial institutions to introduce rigorous risk management on SME assets.

In what role does SME lending play in the Korea banking business?

For SME customers, various financial needs such as loan, deposit, card, and FX exist. In fact, while the size of SME lending increased just by KRW 10.8 TN (USD$10.7b) in 2004, it has jumped sharply in 2006 and 2007 by KRW 58.7 TN (USD$58.7b) and KRW 77.4 TN (USD$77.4b) respectively. This significant rise in SME lending volume implied that SME loan portfolio will increasingly become a major source for commercial bank’s revenue.

What should the financial institutions do to capture this opportunity? Do you see any challenges now and in the future?

Despite the growth in SME lending market, handling SME loans required significant amount of expenses for local commercial banks. It’s not easy for the banks to assess debt service capability (affordability) and risk level of each obligor. Moreover, types of SME loan customers vary a lot, ranging from micro self-employed trader, sole proprietor to small sized corporation, and these customers are engaged in businesses which are greatly affected by the economic cycle.

Affordability and risk level of SME obligor fluctuate overtime, so it’s difficult for banks to capture the fluctuation on a timely basis. As SME customers exhibit attributes of both retail and corporate obligor, it’s widely believed that qualitative assessment is a must. But in reality, there are constraints in quantifying qualitative factors, which led to issue like increased business cost, delay in loan processing, and ambiguity over underwriting criteria.

Has Experian Decision Analytics Korea (EDAK) offered any capabilities on SME lending to local Korea banks? How?

A couple of our client cases can illustrate this.

Bank A: In order to assess SOHO customers that show characteristics of both retail and corporate obligor, the client used to operate a dual loan process, that is, using retail scoring model to assess the customers and applying the outcome of its corporate rating model. As a result, the complication of its rating process compromised work efficiency and undermined model stability. To address this issue, we worked with the client to develop a sophisticated ASS and BSS model for SOHO portfolio based on quality-driven data analysis on SOHO customers. The client has also deployed Experian’s Strategy Management Solution to implement SOHO specific loan process. The Solution has played a key role in automating a large part of the loan process, and laid a foundation for improving decision strategy quickly through on-going monitoring of current strategy and scoring model.

Bank B: The client handled SOHO portfolio through complicated procedures and credit officers’ subjective judgment. Since all applications were processed by credit officers, inconsistent responses to customers and increased processing time and cost occurred. Moreover, as these officers had to be accountable for SOHO loans that went bad, they were reluctant to handle SOHO portfolio. To address these challenges, we worked toward improving the client’s limit strategy and cut-off strategy (including policy rules), and succeeded in automating most of the SOHO loan process by introducing our Strategy Management Solution. By reflecting characteristics of SOHO customers into the process and implementing systematized loan decision support tool based on strategic factors like customer risk and transaction risk, it surely has improved cost-effectiveness of the loan process. With the new SOHO origination process, above all, personal accountability for bad loans originated from the automated process has been waived; in return, their tendency to avoid SOHO loan origination is minimized.

Bank C: At the time of the project, the client was aiming at renewing its existing loan process and strategy full-fledged to automate retail and SOHO lending. With regard to its current key strategies including limit, pricing, fee structure, we have worked with the client to validate the adequacy of its AS-IS strategy and develop its To-Be strategy. The simulation outcome proved that the client’s AS-IS limit strategy was inadequate for controlling default risk of SOHO loan. To address this issue, we developed and provided a TO-BE strategy which enabled the client to reduce bad rate while maintaining its current total exposure.

What is the strongest point of EDAK on your view to support these financial institutions?

With deep knowledge and know-how in obligor risk modeling, strategy consulting to strategy management throughout the credit life cycle, we support clients in setting up the most efficient process and loan review framework. By providing the best optimized outcome through data analysis, we offer services that enable clients to improve customer satisfaction and maximize profitability. In particular, having a professional team with ample experiences in financial sector and in-depth expertise in each of our business area including analytics, business consulting, delivery; it truly is equipped with the capability to serve as a branch of the global company, and not just an agency.

We are dedicated to grow together with the financial industry which is becoming a major growth engine of the Korean economy. Given the advantages of both global and local technology know-how, we continued to transfer such knowledge proactively to financial institutions to achieve win-win outcomes.

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