Government Considers Easing Funding Regulations for Loan Businesses and Expanding Support for Victim Relief

Financial Authorities to Announce Measures in H1 to Address Side Effects of Legal Maximum Interest Rate Reduction
Conditional Approval for 1st Tier Financial Funding...Free Support for Debtor Representatives and Litigation Lawyers

Illegal Loan Business Advertisement Leaflet (Photo by Seoul City)

[Asia Economy Reporter Kwangho Lee] In relation to the statutory maximum interest rate reduction (from 24% to 20%) to be implemented in July this year, the government is preparing various supplementary measures to minimize market side effects, including easing funding regulations for lending companies, strengthening penalties for illegal private loans, and expanding support for policy-based financial services for low-income citizens.

A financial authority official stated on the 30th, "As announced in this year's work plan, we will announce supplementary measures in the first half of the year to enhance financial inclusion." The announcement is expected in the second quarter of this year, no later than May.

◆Will funding regulations for lending companies be eased?= Currently, lending companies procure funds at interest rates of 5-6% through secondary financial institutions such as savings banks and capital companies. There is a proposal to expand this to primary financial institutions like banks to lower funding costs. Additionally, measures to allow large lending companies to issue public bonds and asset-backed securities are also being considered.

An industry insider said, "The average loan loss provision ratio for lending companies is 10% of the loan amount, and they borrow funds from secondary financial institutions at an average rate of 5-6%. Brokerage fees, labor costs, and advertising expenses each account for 2-3%, so even with a 24% interest rate loan, the structure results in only 1-2% profit or losses." He added, "Costs such as loan loss provisions, brokerage fees, and labor expenses cannot be further reduced. Easing funding regulations and loosening strict laws are necessary to prevent borrowers from turning to illegal private loans."

The financial authorities are aware of these points but are concerned about moral hazard among lending companies. They are also worried that the government might be perceived as protecting high-interest lending companies. However, since the statutory maximum interest rate reduction could lead to mass business suspensions by lending companies and push low-income citizens toward illegal private loans, they are expected to consider multifaceted measures such as conditional approvals.

An industry expert predicted, "If the government eases funding regulations for lending companies, it may face criticism for encouraging high-interest loans and conflict with banks that value their image. Conditional approvals and incentives will likely be given to lending companies that expand supply to low-income and low-credit citizens."

◆Strengthening penalties and expanding victim relief support= Financial authorities estimate that about 39,000 people will be driven to illegal private loans due to the statutory maximum interest rate reduction.

Accordingly, they plan to strengthen the legal basis by enhancing penalties for illegal private loans and limiting illegal profits, continue and intensify joint crackdowns and blocking of illegal advertisements through the 'Inter-Ministerial Illegal Private Loan Response Task Force (TF),' and expand victim relief support such as free support from debtor representatives and litigation lawyers.

Previously, at the end of last year, the government passed related legislation to prevent illegal private lenders from charging interest exceeding 6% per annum. The purpose was to encourage illegal lenders to register as lending businesses.

Also, penalties for violating the maximum interest rate were increased from imprisonment of up to 3 years or fines up to 30 million won to imprisonment of up to 3 years or fines up to 50 million won. For unregistered operations, fines were doubled to 100 million won compared to the current level.

From June to November last year, a joint government crackdown on illegal private loans resulted in the arrest of 4,138 illegal private lenders and the detention of 49 individuals.

Additionally, the government plans to strengthen debt support for vulnerable borrowers by expanding policy-based financial funds such as the Sunshine Loan (Haetsal Loan) for low-credit borrowers by more than 270 billion won annually.

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