The Annual 10% Cap on Maximum Interest Rates Meant to Help the Common People... Could It Block Their Access to Funds? (Comprehensive)

Gyeonggi Province Governor Lee Jae-myung Sent Letter to Ruling Party Lawmakers on the 7th
"We Must Lower the Maximum Interest Rate," He Appeals
Loan Industry Average Interest Rate 17.9% "If Rates Drop, We Must Close"
Authorities Also Express Negative Stance

[Asia Economy Reporter Kim Min-young] The financial sector is strongly opposing the political push to lower the statutory maximum interest rate to below 10% per annum. The lending industry and secondary financial institutions, which are directly affected by the maximum interest rate, are raising concerns that discussions about lowering interest rates could increase uncertainty in the market, calling it "unrealistic talk." There are also criticisms that policies intended to help low-income people might actually cut off their access to funds.

According to sources in politics and finance on the 11th, Lee Jae-myung, Governor of Gyeonggi Province, sent a letter on the 7th to all 176 ruling party lawmakers requesting the reduction of the statutory maximum interest rate for lending businesses from 24% to 10%. Governor Lee appealed, saying, "In the current era of low interest rates and low growth with a base rate of 0.5%, a 24% interest rate is extremely high," and added, "It is time to wipe the tears of those struggling under unbearable debt after desperate efforts to survive."

Political Circle Proposes Bill to Set Statutory Maximum Interest Rate at 10%

On the same day, Kim Nam-guk, a member of the Democratic Party of Korea, took the lead in proposing amendments to the Lending Business Act and the Interest Limitation Act to lower the maximum interest rate to 10%. Currently, the maximum interest rate is 27.9% under the Lending Business Act and 25% under the Interest Limitation Act, but both are effectively set at 24% according to enforcement ordinances. Earlier, on the 4th, Moon Jin-seok of the same party also led a bill to reduce the maximum interest rate to 10%. On June 1, shortly after the 21st National Assembly convened, Kim Cheol-min of the Democratic Party proposed a bill to set the maximum interest rate at 20%.

This movement is based on the rationale of easing the interest burden on low-income people. However, the consensus is that it could deprive them of opportunities to borrow money through formal channels. Even now, the loan approval rate for lending businesses and savings banks is known to be below 10%. This means that only one out of ten loan applicants is approved.

Industry: "Comments Made Without Understanding Reality"

The lending industry is under immediate threat. As of the end of last year, the average loan interest rate in the lending business was 17.9% (21.1% for unsecured loans, 13.8% for secured loans). Lowering the maximum interest rate to 10% is tantamount to telling them to shut down. Two top-tier companies stopped offering unsecured loans last year. A lending industry official pointed out, "While a 20% maximum interest rate can be justified as being equal to Japan's maximum rate, 10% is a number without any basis."

The savings bank sector is also dissatisfied. One official said, "Following the financial authorities' directive to pioneer the mid-interest rate market of 15-19%, we have been actively selling mid-interest loan products, but if the maximum interest rate drops to 10%, unsecured loans will disappear and only corporate loans will remain." The average unsecured loan interest rates at major savings banks range from 13.71% to 18.58%.

The credit card industry, which had been watching from the sidelines, can no longer remain silent. As of last month, the card loan interest rates of five major card companies (Shinhan, KB Kookmin, Samsung, Hyundai, and Woori) ranged from 13.32% to 16.99%, and major capital companies' rates ranged from 12.02% to 19.31%. All secondary financial institutions have unsecured loan interest rates exceeding 10%, so if the maximum interest rate falls below 10%, they would effectively be conducting illegal lending operations.

Financial Authorities: "Premature"

The National Assembly and financial authorities have also expressed negative views. A review report by a National Assembly expert on Kim Cheol-min's bill stated, "If the maximum interest rate is lowered, borrowers with low credit who have no choice but to use high-interest loans may face reduced borrowing opportunities and could be driven to illegal private lending markets." The Financial Services Commission also said, "It is necessary to comprehensively consider trends in the funding needs of low-income people, the business conditions of high-interest financial sectors, and the supply of policy financial services for low-credit borrowers to decide the timing and method of any reduction to avoid side effects that restrict access to funds for low-credit groups." The Bank of Korea and the Korea Federation of Banks also warned that borrowing opportunities for low-credit groups could shrink.

According to the Financial Supervisory Service's survey on illegal private lending markets, as of the end of 2018, 410,000 people were using illegal private loans amounting to 7.1 trillion won. The average interest rate was 26.1%, with a maximum rate reaching 61%. About 45% of loans exceeded the statutory maximum interest rate.

Some question whether the repeated proposals to lower the maximum interest rate by lawmakers from committees other than the National Assembly's Political Affairs Committee have political motives. A financial sector official said, "Members of the Political Affairs Committee, who understand concerns about tightening access to funds for low-income people, are unlikely to agree with the 10% bill," adding, "It seems intended to attract public attention." Kim Nam-guk, the lead proposer of the 10% bill, belongs to the Legislation and Judiciary Committee, and Moon Jin-seok is a member of the Land, Infrastructure and Transport Committee. Among the Political Affairs Committee members, only Lee Jung-moon of the Democratic Party has signed onto the 10% bill.

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