July's Maximum Interest Rate Reduced to 20%, No 'Retroactive Application' to Existing Loans (Comprehensive)

[Asia Economy Reporter Kwangho Lee] As the statutory maximum interest rate is set to be lowered to 20.0% annually this coming July, it has been decided that the reduction will not be applied retroactively to existing loans. Instead, financial authorities plan to encourage refinancing for existing high-interest borrowers through policy-based financial products for low-income individuals. There is also consideration to reduce the current loan brokerage commission, which stands at around 4%, to the 2% range.

According to financial authorities and the financial sector on the 10th, the Financial Services Commission (FSC) plans to announce supplementary measures in May to enhance financial inclusion following the reduction of the maximum interest rate.

An FSC official stated, "We are comprehensively reviewing various measures to minimize the impact on the financial market caused by the reduction of the maximum interest rate."

Mandatory Retroactive Application Seen as 'Excessive Pressure'

The FSC has decided not to apply the reduced maximum interest rate of 20.0% retroactively to existing loans in the case of loans from specialized credit finance companies and private lenders starting from the implementation date. Instead, it will encourage voluntary reductions within the private sector. Since there is no contractual obligation to apply the reduction retroactively under current terms, forcing it could be perceived as 'excessive pressure.'

In fact, when the maximum interest rate was lowered from 27.9% to 24.0% in 2018, card companies, capital companies, and savings banks applied the reduced maximum interest rate retroactively to existing loans at the request of financial authorities, which sparked controversy. However, in the case of savings banks, the Basic Credit Transaction Terms were revised the same year to require retroactive reductions of the statutory maximum interest rate for loan contracts concluded thereafter. As a result, borrowers from savings banks are expected to benefit from retroactive application, raising concerns about fairness.

To address these issues, the FSC plans to promote refinancing through four major policy-based financial products for low-income individuals: Microfinance, Sunshine Loans, New Hope Loans, and Change Dream Loans. Borrowers will be encouraged to take out loans with these low-interest policy products to repay previous loans or overdue amounts. To this end, the supply will be expanded by more than 270 billion KRW annually, and support for debt adjustment and credit recovery for vulnerable and delinquent borrowers will also be increased.

Consideration to Lower Loan Brokerage Commission to 2%

Additionally, the loan brokerage commission charged when introducing borrowers to lending companies will be reduced. Currently capped at 4% under the Enforcement Decree of the Loan Business Act, the commission is expected to be lowered to around 2%. An FSC official explained, "The exact level has not yet been finalized."

To prevent concerns that the reduction of the statutory maximum interest rate will make it difficult for low-income individuals to access funds, a 'Loan Business Premier League' will also be introduced to ease funding regulations for lending companies. This Premier League will provide various benefits such as relaxed funding, operational regulations, and sanctions for large lending companies with assets exceeding 10 billion KRW that have never been sanctioned by the Financial Supervisory Service or other authorities. Currently, lending companies raise funds at interest rates of 5-6% through secondary financial institutions like savings banks and capital companies, but borrowing from primary financial institutions such as banks could lower their funding costs.

Amendments to the Loan Business Act will also be pursued to strengthen penalties against illegal private lending companies, addressing concerns about moral hazard in the lending industry. Those who operate lending or loan brokerage businesses without registration or charge interest rates exceeding the maximum legal rate will face fines of up to 100 million KRW.

Need to Consider Impact on Loan Business Market

Regarding this, a representative from the lending industry expressed concern, saying, "If the loan brokerage commission is lowered further than now, there will be strong resistance due to reduced earnings for recruiters," and added, "The impact on the loan business market must be taken into account." They also stated, "Only a few companies will benefit from the Loan Business Premier League system," and emphasized, "Practical benefits that ease strict regulations are necessary."

Another industry insider pointed out, "Even if the Loan Business Premier League system is implemented, it is questionable how actively commercial banks will supply funds," and warned, "There could be conflicts with banks that prioritize their image."

An FSC official responded, "While a cooperative relationship within the industry is important, it is crucial to minimize the contraction of credit supply to low-credit borrowers," and concluded, "It is necessary to view the loan business market comprehensively as an integrated sector."

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