Credit-specialized financial companies

Credit-specialized financial companies (여신전문금융회사) are financial institutions that provide only loan services, and not deposit services. They commonly raise funds by issuing bonds and borrowing from financial institutions, and operate these funds through investment vehicles which other financial companies rarely invest in, such as consumer finance, leasing and venture capital funds.

Key words
credit-specialized financial companies, credit card business, facilities leasing business, installment financing business, venture capital business

Types of Credit-specialized Financial Companies
The Specialized Credit Financial Business Act (여신전문금융업법), enacted in August 1997 (enforced from January 1, 1998), defines the businesses conducted by credit-specialized financial companies to be:
 * Credit card business,
 * Facilities leasing business,
 * Installment financing business, and
 * Venture capital business.

Credit-specialized financial companies that retain no function of providing deposit services do not require entry regulations for securing soundness, and so the establishment of such companies requires simple registration with the Financial Services Commission (FSC, 금융감독원). For the establishment of credit card businesses, however, which have payment and settlement functions, in order to maintain credit system order and protect consumers permission must be obtained from the FSC. In contrast, superstore operators and others falling under the Distribution Industry Development Act (유통산업발전법) may conduct the credit card business following registration with the FSC only.

Statistics
As of the end of June 2011, the number of companies registered as credit-specialized financial companies or permitted to conduct such business totaled 64, with combined assets of 149 trillion won. Among them, credit card companies accounted for the largest portion (76 trillion won), followed by installment financing companies (42 trillion), leasing companies (26 trillion won) and new technology venture capital companies (5 trillion won).

Differentiated minimum capital requirements are applied to credit-specialized financial companies, in accordance with the scopes of the specific types of business they conduct. Carrying out of two or fewer credit-specialized financial businesses requires 20 billion won or more in capital, while operating three or more requires a minimum of 40 billion won. On the other hand, two billion or more won in both capital and equity capital is mandated for conduct of the credit card business not as a credit-specialized financial company but concurrently as a loan service provider.

Business Operations
In addition to the inherent businesses allowed through registration or permission, credit-specialized financial companies may provide other services including loans, bill discounts, acquisition, maintenance and recovery of accounts receivables, credit verification, purchases of bonds owned by other financial institutions or securities issued based on those bonds, payment guarantees, management of liquid assets, and other services.

The manners of raising funds allowed to credit-specialized financial companies are restricted to borrowing from financial institutions, issuance of corporate bonds or bills, sales of retained securities, and transfers of retained loans. An exception to the Commercial Act stipulations is granted for the issuance of corporate bonds, which is allowed up to the limit of ten times equity capital.

For operating funds, there is no set limit on loans to a single person, but loans to subsidiary companies are restricted to 100 percent or less of equity capital. As for the acquisition of real estate for business, the FSC can impose limits at any ratio of 100 percent or more of equity capital. Real estate for other than business purposes may not be obtained, excluding real estate to be purchased for facilities leasing or deferred payment or gained through the exercise of securities rights.

Credit-specialized financial companies raise funds mainly by receiving loans and issuing corporate bonds. Fund management is undertaken by focusing on the permitted or registered inherent businesses. As of the end of June 2011, the shares in their total operating funds of those devoted to their inherent businesses stood at 75.4 percent for credit card companies, 33.8 percent for leasing companies, 24.1 percent for installment financing companies, and 7.4 percent for new technology venture capital companies. The shares of lending also accounted for high proportions: 45.2 percent (new technology venture capital companies), 45.0 percent (installment financing companies) and 40.9 percent (leasing companies).

History
Leasing companies (facilities leasing companies 설비대여회사) are financial institutions that provide corporations with equipment funding through lending facilities. As of the end of June 2011, there were 27 leasing companies in business in Korea with assets totaling roughly 26 trillion won.

The first leasing company in Korea was the Korea Industrial Leasing Company, established in December 1972. With enactment of the Facilities Leasing Support Act in December 1973, a foundation for the system was laid. Prior to 1988, there were eight leasing companies in business, and 17 new ones were established between 1989 and 1991. Merchant banks began to integrate the facilities leasing business into their operations in 1978, and new technology venture capital companies entered the field in 1989.

From 1994 through 1996 investment and financial services companies were converted into merchant banks, resulting in a sharp increase in the number of entities that concurrently operated businesses; as of end-1997 the number of specialized leasing companies stood at 25, and that of concurrently-run business entities at 34. Given this intense competition, a number of leasing companies experienced management difficulties as a result of bankruptcies by their counterparts during the 1997 currency crisis.

In response their majority stockholders, banks, employed auto-restructuring methods to reorganize 15 specialized leasing companies, such as through purchases and assumptions (P&As) by bridge financial institutions, mergers and cancellations of registration.

Businesses
Leasing companies carry out services related to facilities leasing and deferred payment sales. Facilities leasing signifies a financing method by which specified newly purchased or leased goods are leased to clients for use over a set period against periodic payment (lease payment) in installments. A deferred payment sale refers to a financing method through which specified newly acquired goods are delivered to clients for use, against payment of the price plus interest and other fees in periodic installments over a predetermined period. The disposal of the goods upon completion of the leasing period, and matters concerning transfer of goods ownership in deferred payment sales, are intended to be decided through agreement between the parties concerned.

Examination of the business performance of the facilities leasing services of leasing companies shows that the volume of lease agreements amounted to 15.9 trillion won in 1995, but declined considerably in the aftermath of the 1997 currency crisis to 1.3 trillion in 2000. However, the volume has recently shown a sharp upward trend, rising to 13.9 trillion won in 2010.

History
Credit card companies (신용카드회사) are financial institutions that specialize in consumer financing involving the use of credit cards. As of the end of June 2011 there were seven credit card companies in business, managing total assets of approximately 76 trillion won.

Credit cards were first introduced to Korea in 1969 by one department store. In the 1980s, when banks concurrently conducted credit card businesses, both the issuance and usage of credit cards expanded dramatically.

In May 1987, establishment of the Credit Card Business Act provided an institutional foundation for the credit card business. After the Act’s establishment, some banks concurrently engaging in the credit card business founded subsidiaries to which they transferred their card businesses. Many banks, however, have maintained the conventional system of concurrently providing credit card service. Non-bank specialized card companies have also been newly established since that time.

Businesses
The principal services of the credit card business include the settlement of charges in respect of the use of credit cards, the issuance and management of credit cards, and the recruitment and support of merchants accepting credit cards. In addition to these basic services, credit card companies may engage in incidental businesses, including the provision of financing to credit card holders, the issuance of debit cards and settlement of the related payments, and the issuance and sale of pre-paid cards and settlement of payments.

Amid the trends of increased issuance and use of credit cards, the credit card business showed high growth in the early 2000s, due to measures intended to promote credit card use including the elimination of maximum amounts for cash advances, the adoption of information network systems shared by merchants accepting credit cards, the introduction of an income tax deduction for credit card spending (1999) and subsequent increase in the income tax deduction limit (2001), and the instigation of a credit card receipt lottery system (2000).

In this context, credit companies sought new funding sources to satisfy such eruptive needs for credit card use. The newly introduced asset-backed securitization (ABS) scheme seemed appropriate to the funding source of credit card companies. It started in the late 2000 and sharply increased year after year. In 2002 alone, the share of credit card/loan receivables-backed securitization amounted to 55.7 percent of the total ABS markets. In addition, future cash flows based on credit card payment for, i.e., airfares of Incheon-Tokyo flight contributed to the growth of ABS markets as well as financial innovation.

Credit-specialized financial companies including credit card companies have relied on ABS markets to meet their financial needs, detailed data of which are provided by the Financial Supervisory Service (FSS, 금융감독원) on a regular basis. For example, the analysis of ABS markets in 2011 has been posted on the on-line FSS Business Reports section. However, excessive quantitative expansion led to a rapid increase in credit delinquencies and poor management at credit card companies; after peaking in 2002, the sales of credit card companies plunged. Credit card issuance and use then decreased through the mid-2000s, but has recently shown a slight increase.

After amounting to 104.81 million in late 2002, the number of cards issued had decreased considerably to 82.91 million by late 2005, before bouncing back to 116.59 million as of end-2010. The volume of credit card use, including credit purchases and cash advances, fell from 623 trillion won in 2002 to 364 trillion won in 2005, but climbed back to 494 trillion won in 2010. Meanwhile, the number of merchants accepting credit cards totalled 2.76 million at end-1995, and gradually increased from then to reach 17.70 million as of the end of 2010.

History
Installment financing companies (할부금융회사) are financial institutions managing consumer financing to provide funds for the purchases of goods and services by the users of installment financing. As of the end of June 2011, there were 18 installment financing companies in business, with total assets of 42 trillion won.

In Korea, the installment financing business was introduced in 1995 when an authorization standard was provided via the Credit Card Business Act. Operations began in 1996. When the installment financing business was introduced, installment financing companies were authorized in three classes, in accordance with the items they handled ― general installment financing companies, housing installment financing companies, and machinery installment financing companies ― and each type of company was restricted to handling appropriate items. However, the authorization classification and restrictions on items handled were later abolished with establishment of the Specialized Credit Financial Business Act in 1997.

When the installment financing business was first launched in March 1996, 31 companies entered the business. The number of specialized companies was significantly reduced thereafter, however, following mergers with credit card companies, closures of some housing installment financing companies, and other incidents.

Businesses
Installment financing denotes a method of financing whereby the companies involved conclude agreements between the buyers and sellers of goods and services, outlay to the sellers sums of money for the purchases of these goods and services and collect principal repayment and interest from the buyers in installments. Therefore, installment financing companies are not allowed to lend financed capital exceeding the purchase prices of the goods and services concerned.

In order to prevent use of the financed capital installments for other purposes, moreover, a finance company must also make direct payment of the financed capital to the seller of the goods and services. In addition, installment financing companies provide factoring services, through which they lend capital to enterprises by buying accounts receivable created by sales on credit of the enterprises, and serve as agents for managing and collecting these accounts receivable. They also offer household loan services, including lending capital for school tuition, marriage expenses and household lease deposits, based on credit or collateral.

Looking at the volume of installment financing engaged in by installment financing companies, newly acquired installment financing amounted to 14 trillion won in 2000, but then fell rapidly to the 10 trillion won level in 2005, due to a tightening of credit management and decreased consumption. The volume has recently risen again, to slightly above 10 trillion won as of the end of 2010. The amount of installment financing outstanding meanwhile dropped from nine trillion won in late 2002 to seven trillion won in 2005, and then as of the end of 2010 had rebounded to 11 trillion won.