Last Year, 208 Loan Businesses Sanctioned... 37 Already Penalized This Year

Frequent Cases of Failure to Comply with Change Registration and Report Submission Due to Lack of Regulation Awareness
Some Loan Companies Face Severe Penalties for Exceeding Overdue Limits or Capital Erosion
Closure and Evasive Practices May Increase if Legal Maximum Interest Rate Drops 20% in Second Half

[Asia Economy Reporter Song Seung-seop] Following last year, this year as well, a surge of lending companies have been disciplined by financial authorities due to poor management and illegal activities. It is expected that as profitability worsens due to the reduction of the legal maximum interest rate, the tendency to rely on illegal practices for survival will deepen, leading to an increase in disciplinary cases.

According to the Financial Supervisory Service (FSS) on the 8th, a total of 37 lending companies have been sanctioned by financial authorities so far this year. This is analyzed as a result of a large-scale investigation conducted in 2019, which has led to a surge in disciplinary cases.

Frequent Violations of Change Registration Obligations and Report Submissions... Companies Exceeding Delinquent Interest or Experiencing Capital Impairment

Most disciplinary reasons stemmed from insufficient understanding of regulations, such as failing to comply with the obligation to register changes or violating report submission standards that lending companies must follow. According to the Act on Registration of Loan Business and Protection of Financial Consumers, companies that did not register changes in executives or business locations with the FSS within 15 days, or failed to submit regularly required business status reports, totaled 34 cases (including duplicates).

There were also signs of evasive operations, such as repeatedly changing executives and locations multiple times within a short period without notifying authorities. One lending company operated by replacing five executives over about a year in periods ranging from 2 to 6 months. The location of its field offices was changed three times within 8 months without reporting. Another lending company was caught changing executives, names, and locations five times and received a severe disciplinary action of institutional caution.

Illegal practices such as violating the upper limit on delinquent interest rates or excessively increasing assets were also found to persist. Another lending company was found to have entered into loan contracts worth 33.733 billion KRW exceeding the delinquent interest rate cap with 268 debtors.

This company also violated the “prohibition of excessive lending” clause, which restricts loans beyond the debtor’s objective repayment ability by assessing income and assets of the counterparties. Loans executed without income and asset verification documents amounted to 13.473 billion KRW.

Three companies were detected to have increased total assets beyond the legal limit of 10 times their equity capital, resulting in capital impairment. One company that expanded its total assets up to 26.5 times received a severe disciplinary action of a 6-month full business suspension and a reprimand warning for one executive.

Shrinking Lending Market, Will Disciplinary Cases Among Lending Companies Surge?

Regarding the flood of sanctions in the lending industry, there are coexisting views that sound business practices will be established through the detection of poor management and illegal operations, and that the worsening profitability of lending companies will lead to a surge in sanctioned companies.

An FSS official said, "We have been conducting audits periodically before and will continue to do so as there have been financial accidents," adding, "The basic purpose is to protect investors and consumers through audits."

Some express concerns about a balloon effect, where companies whose profitability worsens due to the legal maximum interest rate being lowered to 20% in the second half of the year may report closures or engage in new evasive operations. Among the sanctioned companies, 21% appear to have effectively closed, either by failing to produce business results for six months or by having unknown locations.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics advised, "While the reduction of the maximum interest rate is a necessary policy measure, supplementary measures should be prepared as problems may arise centered on lending companies."

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