Legal Maximum Interest Rate to Be Reduced to 20% from Second Half of Next Year... "Annual Burden Relief of 500 Billion Won"

President Moon's Pledge... From the Second Half of Next Year, 24% → 20%
Concerns Over Higher Loan Thresholds for Vulnerable Groups

Kim Tae-nyeon, the floor leader of the Democratic Party of Korea (center), is speaking at the party-government consultation on lowering the legal maximum interest rate held at the National Assembly on the 16th. (Photo by Yonhap News)

[Asia Economy Reporter Kim Hyo-jin] The government and the ruling party have decided to lower the statutory maximum interest rate from the current 24% to 20%, a reduction of 4 percentage points. This marks about two and a half years since the maximum interest rate was reduced from 27.9% to the current level in February 2018. The rationale presented by the government and ruling party is the need to alleviate the financial burden on vulnerable groups such as low-income and low-credit individuals. However, contrary to this stance, concerns are rising that this decision may push a significant number of ordinary citizens outside the formal financial system, into the illegal private loan market.

On the morning of the 16th, the Financial Services Commission, the Financial Supervisory Service, and the Ministry of Justice announced the 'Plan to Lower the Statutory Maximum Interest Rate' based on the results of a government-ruling party consultation held at the National Assembly in Yeouido, Seoul, with the Democratic Party of Korea. Taking into account economic uncertainties caused by the novel coronavirus disease (COVID-19), the government and ruling party plan to revise related enforcement ordinances aiming to implement the lowered maximum interest rate from the second half of next year.

The government and ruling party estimate that lowering the maximum interest rate by 4 percentage points will reduce the annual interest burden by approximately 483 billion KRW for about 2.08 million borrowers (87% of approximately 2.39 million borrowers as of March this year) who were using loans with interest rates exceeding 20%, amounting to 14.2 trillion KRW. On the other hand, they estimate that about 316,000 vulnerable borrowers (13%, approximately 2 trillion KRW) who do not fall under this category may experience a contraction in private financial usage over the next 3 to 4 years as their loan maturities come due.

Among these, the government and ruling party expect that about 39,000 people (230 billion KRW) may be unable to obtain loans from licensed lenders such as loan companies and may flow into the illegal private loan market. Considering these concerns, financial authorities plan to expand the supply of policy-based microfinance products for low-credit borrowers (such as the Sunshine Loan) by more than 270 billion KRW annually and strengthen debt adjustment and credit recovery support for vulnerable and delinquent borrowers.

Additionally, financial authorities intend to minimize the exposure of ordinary citizens to harm by strengthening penalties for illegal private loans and limiting illegal profits. They plan to enhance crackdowns and block illegal advertisements through a joint task force (TF) involving multiple ministries to respond to illegal private loans. They will also strengthen tailored support linking finance, legal, and welfare services, such as free support from debtor representatives and litigation lawyers. At the same time, they aim to support the competitiveness of low-credit and high-interest financial sectors by providing incentives to exemplary companies supplying credit loans to low-credit ordinary citizens.

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