"57 Manmyeong May Turn to Illegal Private Loans Due to Court's Maximum Interest Rate Reduction Policy"

Possibility of Tightening Burden on Common People Under the Pretext of 'Reducing Their Burden'
"Could Lead to Unexpected Outcomes Like the Lease 3 Laws"

[Asia Economy Reporter Kim Hyo-jin] As the government and the Democratic Party of Korea decided on the 16th to lower the statutory maximum interest rate from the current 24% to 20%, concerns are rising about instability in the low-income financial market. Although the rationale of easing the interest burden on low-income people is good, in reality, it could result in hundreds of thousands of low-income individuals being pushed into the illegal private loan market.

It is also expected that companies such as card and capital companies, savings banks, and loan businesses that have been charging interest rates close to the maximum rate will suffer significant damage. In particular, there are concerns that the loan industry, which faced many closures or suspended unsecured loans following the 2018 maximum interest rate cut (to 24%), could again face a wave of bankruptcies.

Kim Tae-nyeon, the floor leader of the Democratic Party, said at the maximum interest rate reduction party-government meeting held at the National Assembly on the morning of the same day, "The Bank of Korea's base interest rate is 0.5%, and the low-interest era continues," adding, "Setting the maximum interest rate at 24% is anachronistic." Han Jeong-ae, the chairperson of the Democratic Party's Policy Committee, also pointed out, "As of June, there are over 3 million loans with interest rates exceeding 20% across all financial sectors, amounting to more than 15 trillion won."

Eun Sung-soo, chairman of the Financial Services Commission, stated, "In the case of loan businesses frequently used by low-credit low-income people, the statutory maximum interest rate is uniformly applied regardless of actual repayment ability," adding, "Without lowering the maximum interest rate, the burden cannot be reduced."

The rationale presented by the party and government is the stabilization of low-income finance. The judgment was that lowering the maximum interest rate would certainly help reduce financial costs for low-credit low-income groups. It is also analyzed that President Moon Jae-in's election pledge influenced the party-government's decision. The problem is that such measures could restrict the use of loan businesses, which are the stronghold of low-income finance.

Professor Choi Cheol of the Department of Consumer Economics at Sookmyung Women's University estimated through a study titled "Institutional Improvement of the Loan Finance Market for Inclusive Low-Income Finance" that if the maximum interest rate is lowered by 4 percentage points, about 570,000 low-credit borrowers would flow into the illegal private loan market. This estimate is based on the assumption that the average loan amount per person is 5.24 million won, resulting in an excess demand of about 3 trillion won.

Professor Choi pointed out, "If loan suspensions in the loan industry increase due to the interest rate cut, the number of demanders who cannot get loans will increase further," adding, "In addition to the additional damage caused by financially desperate consumers resorting to illegal private loans, the mid- to long-term contraction of the loan finance market will lead to a more serious financial exclusion situation."

Professor Kim Sang-bong of Hansung University’s Department of Economics stated, "An analysis of statutory maximum interest rate reductions in 2011, 2014, and 2016 shows that when the maximum interest rate drops by 1 percentage point, at least 26 trillion won of low-credit loan demand is absorbed by the illegal private loan market." Professor Kim expressed concern, saying, "Regardless of the goodwill behind the policy, lowering the maximum interest rate could lead to unexpected results like the 'Three Lease Laws'."

Concerns Over 'Vicious Cycle' of Second-Tier Financial Sector Contraction

The second-tier financial sector, mainly used by low-income people, is also on high alert. The savings bank industry expects annual interest income to decrease by more than 20% due to the statutory maximum interest rate cut. A savings bank industry official pointed out, "Pressure on management could increase even before the reduced interest rate is actually applied," adding, "The burden from the interest rate cut will be felt most heavily by low-income people."

Card companies, another quick cash channel for low-income people, are in the same situation. An industry official said, "We will inevitably have to reduce card loan lending to low-credit borrowers (credit grades 7 to 10)."

Loan businesses are expected to be directly hit by the statutory maximum interest rate cut. According to the Financial Services Commission, as of the end of last year, the loan balance of loan businesses was 15.917 trillion won, down 4.5% (757 billion won) from 16.674 trillion won at the end of June the same year. The number of loan businesses also decreased by 22 to 5,652 compared to 5,674 at the end of the first half. The number of users was 1.777 million, showing a decrease of 230,000 (11.5%) in half a year. The number of loan business users fell below 2 million for the first time in over nine years since the end of June 2010.

This is analyzed to be because, after the government lowered the statutory maximum interest rate from 27.9% to 24% in 2018, large loan businesses stopped or drastically reduced new loans. A financial sector official criticized, "Who doesn't know that the maximum interest rate cannot be kept at 24% forever?" but added, "The important thing is the speed and timing, and I think the policy is being pushed too hastily due to events like next year's by-elections."

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