Large Loan Companies Also Unable to Survive and Closing Down... Low-Credit Borrowers Driven to the Private Loan Market

Profitability Declines Due to Maximum Interest Rate Reduction
Number of Firms Registered with FSC Decreases at Year-End
User Count Falls Below 2 Million for First Time in 9 Years
Private Loan Fraud Reports Surge in April-May

[Asia Economy Reporter Kim Min-young] Loan companies are closing down one after another. The closure of loan companies whose profitability has deteriorated due to the reduction of the maximum interest rate on loans is increasing. While the intention to reduce the interest burden on low-income people is good, there are concerns that the balloon effect is growing, with low-credit borrowers who have been cut off from funding turning to illegal private loans.

According to financial authorities and the industry on the 1st, as of the second half of last year, the total number of registered loan companies was 8,354, an increase of 44 from the end of the previous year (8,310). However, the number of corporate loan companies decreased by 50, from 2,785 to 2,735 during the same period. Only the number of individual loan companies increased by 94.

The number of Financial Services Commission-registered companies with assets exceeding 10 billion won also decreased by 145, from 1,500 at the end of 2018 to 1,355 at the end of last year. The number of companies with less than 10 billion won, which report to local governments, increased by 189 during the same period, from 6,810 to 6,999.

As large corporations, which account for most of the market, decreased, the total number of loan users also sharply declined. As of the end of last year, the number of users was 1,777,000, down 436,000 from the previous year. The number of loan users falling below 2 million is the first time in about nine years since June 2010.

The loan balance also shrank. At the end of last year, it was 15.9 trillion won, a decrease of 1.4 trillion won from 17.3 trillion won at the end of 2018.

The financial authorities and the industry have sharply different views on the contraction of the loan market. The financial authorities cited causes such as the suspension of new loans by the Japanese large loan company Sanwa Money and the reduction of operations by loan companies that acquired savings banks. On the other hand, the industry sees that loan companies are voluntarily closing their businesses as the financial authorities, who regard loan companies as a 'necessary evil,' exert pressure and the legal maximum interest rate was lowered to 24% per annum and is likely to be further reduced to 20% under the current government.

Also, while the authorities analyze that low-credit borrowers from the loan market have moved to policy financial products for low-income people and the mid-interest loan market, the industry estimates that more than half of the approximately 400,000 people have flowed into illegal private loans. An industry official said, "Low-income people who cannot even borrow money from loan companies have nowhere to go but illegal private loans."

According to the financial authorities, the number of low-credit borrowers reached 3.53 million as of the end of last year. Policy financial products for low-income people such as 햇살론 (Haetsal Loan) supplied 8 trillion won last year, and new supply of Sa-itdol loans for low-credit borrowers was only 574.7 billion won as of 2018.

Since the beginning of this year, due to the COVID-19 pandemic, the low-income economy has become more difficult, and there are signs that the use of illegal private loans is increasing. According to the Financial Services Commission, reports of illegal private loan damage increased by more than 50% in April and May compared to the same period last year. Last year, an average of 20 reports were received daily, but in April and May this year, 33 and 30 reports were received respectively.

The size of the illegal private loan market is estimated at 7.1 trillion won and 410,000 users as of 2018. Being a blind spot, the financial authorities only estimate and have not accurately grasped the exact size or actual conditions. In particular, as the authorities recently announced that the interest rate that illegal private loan operators can receive will be limited to 6%, the private loan market is expected to become more underground and expand in the future. A financial sector official pointed out, "Even the top-tier loan companies are suspending operations due to the reduction of the maximum interest rate," and added, "Measures are needed to prevent low-credit borrowers from being driven into the illegal private loan market."

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