Illegal Private Loans Flourish Amid COVID-19... Low-Credit Low-Income Citizens Pushed into Blind Spots (Comprehensive)

Illegal Private Loan Damage Consultations Surge from January to March
Nearly 36,000 Financial Delinquents
"Need for a Foundation to Revitalize the Microfinance Market"

Amid the deepening struggles of self-employed workers due to the impact of COVID-19, Seoul's Hwanghak-dong Kitchen Street appeared quiet on the 30th of last month. Photo by Mun Ho-nam munonam@

[Asia Economy Reporters Hyojin Kim and Minyoung Kim] As the impact of the novel coronavirus infection (COVID-19) spreads, low-credit low-income citizens are being pushed into a 'financial blind spot.'

Amid signs that illegal private loans targeting low-income citizens who find it difficult to secure funds through formal channels are making a comeback, it has been revealed that nearly 36,000 self-employed individuals are in a state of financial delinquency (credit default) due to inability to repay borrowed money.

According to financial authorities and the financial sector on the 6th, the Illegal Private Loan Reporting Center operated by the Financial Supervisory Service (FSS) received 32,020 consultations related to illegal private loans such as loan sharking through the end of last month this year, marking an approximately 45% increase compared to the same period last year.

There were 29,227 cases up to the 24th of last month, but about 2,800 cases increased within a week thereafter. Accordingly, the FSS issued a consumer alert at the 'caution' level. The FSS has identified that illegal private loans exploiting anxieties caused by COVID-19 are particularly rampant. Since the COVID-19-induced credit crunch began in earnest in March, the general consensus is that this phenomenon will intensify further.

Many of those exposed to illegal private loans are presumed to be small-scale self-employed individuals with credit ratings of grade 7 or lower who have exhausted their capacity to secure funds from formal financial institutions. They are even ineligible for the ultra-low interest rate (annual 1.5%) secondary guarantee loans implemented by the government and commercial banks for COVID-19 victims.

According to data on individual business loans (self-employment loans) submitted by NICE Credit Rating to the office of Kim Jong-seok, a member of the National Assembly’s Political Affairs Committee from the Future Korea Party, as of the end of last year, the number of self-employed individuals in financial delinquency was 35,806. Among them, the vast majority, 34,009, had credit ratings of grade 7 or lower.

The number of self-employed individuals in financial delinquency increased from 33,292 in the second quarter of last year to 35,567 in the third quarter and 35,806 in the fourth quarter. This contrasts with the number of household loan delinquencies, which decreased from 793,963 in the second quarter to 775,692 in the third quarter and 750,714 in the fourth quarter.

Savings banks, which handle a significant portion of low-income financial services in the secondary financial sector, have raised lending thresholds due to the total debt service ratio (DSR) regulations applied since the second half of last year. The loan approval rate for credit grades 6 to 7 at savings banks is already below 10%, limiting their ability to serve as a support for low-credit low-income citizens crushed by the unprecedented COVID-19 crisis.

With the situation worsening even in the lending industry, which is the 'lowest tier' of formal finance, it is expected that the reach of illegal private loans will extend even deeper. According to the Korea Financial Services Association, 10 out of the top 29 companies in the industry have currently suspended new loan operations.

The legal maximum interest rate was lowered to 24% in February 2018, weakening business capabilities, and with the outbreak of COVID-19, many companies have effectively shut down. Meanwhile, the loan approval rate in the lending industry fell by 4.3 percentage points over two years to 11.8% last year.

A survey conducted by the Korea Inclusive Finance Agency from October to December last year targeting about 22,179 low-credit individuals and 570 lending companies found that 70% of respondents had applied for loans from lending companies in the past three years but were rejected.

Cho Sung-mok, president of the Korea Inclusive Finance Agency, said, "Policy financial products cannot replace market functions," adding, "Ultimately, a foundation must be established to revitalize the private low-income financial market."

This content was produced with the assistance of AI translation services.