This Year, 37 Debt Collection Agencies Disciplined... When Will Illegal Practices Decrease?

Frequent Violations of Change Registration and Report Submission Due to Lack of Regulation Awareness
Some Loan Companies Face Severe Penalties for Exceeding Overdue Limits or Capital Impairment
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. Most violations appear to stem from insufficient understanding of work regulations such as failure to comply with change registration obligations and report submissions, while some companies were found to have exceeded overdue interest rates or fallen into capital erosion.

According to the Financial Supervisory Service (FSS) on the 13th, a total of 37 lending companies have been sanctioned by financial authorities so far this year. Most disciplinary reasons were due to inadequate knowledge of regulations, with 34 cases (including duplicates) involving failure to comply with the change registration obligations or violations of report submission standards that lending businesses must follow. Under the Act on Registration of Credit Business and Protection of Financial Consumers, companies must register changes in executives or business locations with the FSS within 15 days or regularly submit business status reports, which some failed to do.

Following 208 companies sanctioned last year, it is analyzed that the number of disciplinary cases continues to surge this year as a result of a large-scale investigation conducted in 2019. The FSS also disciplined about 200 lending companies at the end of last year. Around 60 companies received minor sanctions such as institutional warnings and fines ranging from tens of thousands to hundreds of thousands of won.

This year, signs of evasive business practices were detected, such as repeatedly changing executives and business locations multiple times within a short period without notifying authorities. One lending company replaced five executives over a period of about one year in intervals of 2 to 6 months while operating. The location of its field offices was changed three times within eight months without reporting. Another lending company was found to have changed executives, names, and locations five times, resulting in a severe institutional warning.

Three companies were caught increasing total assets beyond the legal limit of ten times their net capital and falling into capital erosion. One company that expanded its total assets up to 26.5 times received a six-month suspension of all operations and a reprimand warning for one executive.

There were also cases where contracts were made by mediating money through unregistered loan brokers. According to the Loan Business Act, lending businesses cannot receive or lend money to counterparties who have dealt with unregistered loan brokers. Nevertheless, one company handled 22.228 billion won received from unregistered loan brokers to 231 people and was fined 5 million won and recommended to dismiss an executive.

Illegal practices that have been consistently pointed out, such as violating the upper limit on overdue interest rates or excessively increasing assets, remain prevalent. Another lending company was found to have entered into loan contracts worth 33.733 billion won exceeding the overdue interest rate limit with 268 debtors. The company also violated the "prohibition of excessive lending" clause, which restricts loans beyond the borrower's objective repayment ability by assessing income and assets. Loans executed without income and asset verification documents amounted to 13.473 billion won.

Shrinking Lending Market, Will Lending Companies Face Increasing Sanctions?

Regarding the flood of sanctions in the lending industry, there are coexisting views that the detection of poor management and illegal business practices will establish sound business customs, and that worsening profitability in the lending industry will lead to a surge in sanctioned companies. With the statutory maximum interest rate being lowered to 20% in the second half of the year, concerns have been raised that companies suffering from deteriorating profitability may report closures or engage in new evasive business tactics, causing a balloon effect. This is why there are worries that despite large-scale audits, various malpractices may recur.

Among the sanctioned companies, those that have not reported business performance for six months or appear to have effectively closed due to unknown locations already account for 21%. According to the Financial Supervisory Service’s survey on lending companies in the first half of the year announced last December, the loan balance in the lending industry was 15.0431 trillion won, down 5.5% from 15.917 trillion won six months earlier. Large lending companies with assets exceeding 10 billion won are seeing shrinking operating profits or halting new loans.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Lowering the maximum interest rate is necessary from a policy perspective to prevent vulnerable financial groups from being pushed into high interest rates," but added, "If the rate drops to 20%, malpractices centered on lending companies may occur, so supplementary measures should be prepared."

An FSS official said, "We have conducted periodic audits before and will continue to do so given past financial incidents," adding, "The fundamental purpose is to protect investors and consumers through audits."

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