Annual Contribution of 200 Billion Won... Financial Sector Nervous About the 서민금융법

On the 25th, the supplementary budget bill worth 15 trillion won for the 4th disaster relief fund payment is being passed in the National Assembly plenary session. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Kiho Sung] The Financial Support for Low-Income People Act, which requires financial institutions to pay contributions to fund low-income financial products such as Saessal Loan, has passed the critical hurdle in the National Assembly. Since both ruling and opposition parties have reached an agreement, the likelihood of the bill passing the plenary session is high. If the bill is enacted, commercial banks, insurance companies, savings banks, and specialized credit finance companies will have to pay a total of about 200 billion KRW annually in contributions. While the financial sector agrees with the purpose, there is concern over the increased burden due to the mandatory nature of the contributions.

According to political circles on the 27th, the National Assembly’s Political Affairs Committee held a plenary meeting on the 24th and decided to pass the chairman’s proposal on the "Partial Amendment to the Act on Support for the Financial Life of Low-Income People (Amendment to the Financial Support for Low-Income People Act)." However, as proposed by the opposition party, a five-year sunset clause was adopted.

The bill, having passed the standing committee, will go through the Legislation and Judiciary Committee before being submitted to the plenary session. Since the ruling and opposition parties reached an agreement during the Political Affairs Committee’s bill subcommittee process, the possibility of the bill passing the plenary session is high. The plenary session is expected to be held by the end of this month at the latest. Previously, on the 17th, the Political Affairs Committee’s first bill review subcommittee approved the bill by bipartisan agreement.

The amendment expands the scope of financial assets managed by the Low-Income Financial Promotion Agency to make contributions from financial companies permanent. The institutions required to contribute to the low-income financial fund have been expanded from mutual finance and savings banks to include all financial companies handling household loans, such as banks, insurance companies, and specialized credit finance companies. Accordingly, private financial companies must pay contributions up to 0.03% of their household loan balances. This means the banking sector will bear about 105 billion KRW annually, the specialized credit finance sector about 18.9 billion KRW, and the insurance sector about 16.8 billion KRW.

The financial sector is highly dissatisfied with the mandatory collection method. A financial industry official said, "Commercial banks and savings banks are already providing support through programs like Saehope Holssi and special loans for small business owners," adding, "The entire financial sector is performing a public role, so imposing additional burdens is inevitably difficult to bear."

"The entire financial sector is carrying out many roles to fulfill the public function of finance, including social contribution activities and strengthening ESG management," the official said. "Last year, the financial authorities lowered the statutory maximum interest rate, which weakened low-income financial services, and this burden seems to be shifted to private finance."

However, the financial authorities have set the contribution period to be extended until 2025 to ensure stable support for low-income finance. But financial companies such as banks are concerned that since the contribution period is not explicitly stated, it may effectively become a 'permanent contribution.' Along with this, the method of collecting contributions based on credit loan balances is also problematic. Currently, the Low-Income Financial Act stipulates collecting contributions by multiplying credit loan balances by a 0.03% rate, but there is no 'contribution cap' defined. As household loans increase, contributions will also rise. As of the end of 2019, the banking sector’s contribution amounted to about 100 billion KRW. The amount to be contributed is expected to increase as household loan balances grow.

The banking sector fears that this Low-Income Financial Act could be the starting signal for a profit-sharing system. They also express incomprehension over the policy requiring them to bear financial burdens for products they do not even handle.

A banking industry official said, "If the bill passes, each bank is expected to contribute about 20 billion KRW," adding, "It is inevitably burdensome to pay mandatory contributions amid the worsening economic crisis caused by COVID-19."

Another banking official said, "It is a contribution for products that banks do not even handle, so unless it is a profit-sharing system, it is hard to find logical grounds for the law’s enforcement," adding, "Given that financial companies were advised to refrain from dividends to secure cash in preparation for COVID-19, taking that amount is almost the same, making it difficult to understand."

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