They Promised Livelihood Security... Vulnerable Groups Pushed to Financial Cliff by 'Out-of-Step Policies'

Loan Total Volume Management Guidelines
Seem to Tighten Screening at Savings Banks
If Loans Are Uniformly Restricted
Illegal Private Loans Could Breach Safety Nets

[Asia Economy Reporters Kim Hyo-jin and Song Seung-seop] The financial authorities' policy to actively curb household loans from savings banks raises concerns that it could worsen the financial difficulties of low-credit ordinary citizens and push them into financial blind spots such as illegal private loans.

Aside from the necessity of managing soaring household loans driven by the craze for Yeongkkeul (borrowing to the limit) and Debt Investment (borrowing to invest), there are criticisms that the government and ruling party's stance of not overly tightening livelihood loans for low-credit borrowers contradicts this policy. Critics argue that the approach is too mechanical, fixated on the goal of 'total loan volume management.'

◆ Financial Instability Worsens Due to Government and Authorities' Discord = According to financial circles on the 2nd, the Financial Supervisory Service recently conveyed through the Korea Federation of Savings Banks that the key point of the 'household loan management plan' for individual companies is to ensure that the overall household loan growth rate this year does not exceed last year's level of 21.1%.

Therefore, the household loan growth rate excluding policy financial products such as Sunshine Loans and Saetdol Loans and mid-interest loans must be managed within 5.4%, which is expected to lead to stricter screening by savings banks in processes such as unsecured loans.

The detailed guidelines, which require presenting management plans based on first-half loan performance and business plans, as well as quarterly household loan balances and product-specific balance management plans, reinforce this outlook.

As a result, it is anticipated that borrowers currently subject to interest rates ranging from 16% to 24% may find it nearly impossible to obtain loans from savings banks. With the statutory maximum interest rate being lowered from 24% to 20% starting next month on the 7th, savings banks are already in a highly cautious state.

A savings bank official expressed concern, saying, "If the total volume management guidelines coincide with the maximum interest rate reduction, many companies may be unable to conduct loan operations in the second half of the year." The general view is that this trend is far from the policy previously announced by the government and ruling party.

In November last year, Kim Tae-nyeon, then floor leader of the Democratic Party of Korea, stated at a party-government meeting, "If financial companies reduce loans, there is a possibility that low-credit borrowers' access to funds will shrink, and there is a concern that illegal private loans will expand," adding, "We will devise measures to reduce the interest burden on ordinary citizens while not decreasing the supply of unsecured loans."

Financial Services Commission Chairman Eun Sung-soo also mentioned, "We will comprehensively review the level, method, timing, and supplementary measures of the interest rate reduction to maximize its benefits and minimize its drawbacks."

President Moon Jae-in also urged at the Cabinet meeting in March, "Please strive to improve the financial structure more equitably so that low-credit borrowers are not driven into illegal private loans and other such areas."

◆ Urgent Need for Sophisticated Approach Based on Loan Characteristics = According to the Financial Services Commission, as of March last year, about 2,392,000 borrowers had loans with interest rates exceeding 20%, and approximately 2,076,000 borrowers are expected to convert or be absorbed into loans with interest rates below 20% due to the maximum interest rate reduction. This means about 316,000 people could immediately face a 'financial cliff.'

The Korea Inclusive Finance Agency estimates that 80,000 to 120,000 financially vulnerable people moved to the illegal private loan market last year. The amount moved to illegal private loans was calculated to be between 1.04 trillion and 2.1 trillion KRW. Among those who turned to illegal private loans, 69.9% were paying interest rates higher than the statutory maximum interest rate.

About 30% were burdened with interest exceeding the principal on a one-year basis, and an estimated 12.3% faced ultra-high interest rates of 240% or more annually.

A financial industry official pointed out, "Savings bank loans also serve as a safety net to prevent financially vulnerable groups from flowing into illegal private loans, so uniformly tightening loans is no different from creating holes in that safety net."

The financial authorities have stated that for mid-interest loans, they intend to apply guidelines somewhat flexibly without being bound by strict figures, aiming to secure loan channels for low-credit borrowers as much as possible.

A financial authority official explained, "It is true that household loans from savings banks increased significantly last year and require management, but since there is high demand for mid-interest loans, rather than applying measures uniformly, adjustments can be made flexibly according to demand."

Last year, about 75% of mid-interest loans across the entire financial sector were executed by savings banks. A financial industry official said, "The stance of the government, ruling party, and President Moon is that even when managing household loans, the target and nature should be distinguished and approached precisely," adding, "The financial authorities need to move more swiftly to prepare detailed measures that align with this intent."

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