Reducing Interest Burden by Lowering Maximum Interest Rates... Vulnerable Groups Driven to Illegal Private Loans (Comprehensive)

Loan Approval Difficult for Private Loans Due to Interest Rate Standards
Only 1 in 10 Approved
Regulatory Pressure Pushes Vulnerable to Blind Spots
"Urgent Inclusive Alternatives Needed for Vulnerable Groups"

[Asia Economy Reporters Jin-ho Kim and Hyo-jin Kim] Park Ji-young (48, pseudonym), who runs a pub in Changwon, Gyeongnam, has been enduring by borrowing the maximum amount possible from commercial banks and secondary financial institutions since the second half of last year when the impact of COVID-19 hit hard. Even with the loans she gathered, Park could not cover the monthly rent and lost her deposit, prompting her to plan for additional loans.

However, due to her credit rating having dropped to the lowest level, she reached a point where institutional loans, including those from licensed moneylenders, were out of the question. Unable to find a breakthrough, Park recently procured about 30 million won in emergency funds from multiple illegal private lenders introduced by an acquaintance. She could not cope with the increasingly aggressive collection efforts by these lenders, the bleak business outlook with no signs of recovery, the mounting loans, and the snowballing interest pressure, eventually becoming subject to debt adjustment through a financial authority program.

As of 100 days (15 days) after the statutory maximum interest rate was lowered to 20% on July 7, low-income borrowers who cannot find loans within the institutional framework are being driven to illegal private financing. This is interpreted as meaning that as financial authorities tighten loan regulations under the pretext of managing household loans, and even licensed moneylenders?often the last resort for low-income borrowers?raise their lending thresholds to comply with the reduced interest rate standards, more people are falling into the clutches of illegal private lenders. Critics point out that the maximum interest rate reduction, intended to alleviate the interest burden on low-income households, is instead pushing many into financial distress.

◆ Only 1 in 10 loan approvals from licensed moneylenders = According to the Korea Financial Services Association, reports of illegal private financing damage have increased by about 30% compared to the same period last year through August this year. In particular, the financial sector generally views that cases of damage have increased since the maximum interest rate reduction in July. The Financial Supervisory Service’s data supports this analysis, showing that 919 reports and consultations on illegal private financing were received in July alone, about 22% more than the monthly average from January to June.

It is interpreted that financially vulnerable groups such as self-employed people hit hard by COVID-19 initially relied on commercial bank loans and government support programs to "survive," then moved to secondary financial institutions, and when they could no longer secure funds there, turned to licensed moneylenders, eventually falling into the illegal loan market, creating a vicious cycle.

The government lowered the maximum interest rate from 24% to 20% to prevent low-income households from suffering excessive interest burdens. A representative from the licensed moneylending industry pointed out, "The impact of the maximum interest rate regulation is especially felt by licensed moneylenders, who mainly serve low-credit borrowers. Rather than lowering interest rates overall in line with the policy’s intent, loans tend to be executed passively only for those with relatively higher credit scores."

According to data analyzed by the Korea Inclusive Finance Agency, the loan approval rate of licensed moneylenders registered with NICE Credit Information hovers around 11-12%. This means only about 1 in 10 applicants actually receive loans. Many who turn to illegal private financing are inevitably exposed to harsh interest burdens without protection.

According to data submitted by the Financial Supervisory Service to Song Jae-ho, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, the average interest rate charged by unregistered illegal private lenders was 46.4% per annum. This is based on a survey conducted by the Financial Supervisory Service from November last year to January this year, interviewing 10,000 adults aged 20 and over. Cases with "murderous" interest rates as high as 3,300% per annum were also found.

◆ “Urgent need for proactive alternatives to include vulnerable groups” = Experts diagnose that the financial difficulties of vulnerable groups are worsening due to the loan volume regulations pushed by the government centered on financial authorities. Professor Ji-yong Seo of the Department of Business Administration at Sangmyung University said, "As long as volume regulations continue, vulnerable groups will inevitably be pushed toward illegal private financing. Especially, suppressing institutional finance aggressively has created a structure where the illegal private loan market expands beyond secondary financial institutions." Professor Min-hwan Lee of Inha University’s Department of Global Finance analyzed, "The aftermath of volume regulations has further encouraged illegal private financing. While the maximum interest rate reduction has some effect, the most direct cause is the balloon effect caused by volume regulations."

They unanimously agree that to prevent low-income households from being driven to illegal private financing, it is urgent to find market-friendly and inclusive alternatives such as improving one-sided volume regulations and revitalizing policy finance. Professor Lee suggested, "To prevent vulnerable groups whose livelihoods are at stake from using illegal private financing, the government should directly step in to activate policy finance, whether through welfare or other products." Professor Seo urged, "Financial authorities should seek virtuous cycle effects through improving volume regulations and conduct strong regulation and focused crackdowns on illegal private financing."

There are also calls for revitalizing the "Licensed Moneylending Premier League" system, established to help the licensed moneylending sector struggling after the maximum interest rate reduction in July. The system aims to select excellent licensed moneylenders and enable them to procure funds from banks at low interest rates. However, only one out of 21 eligible companies has used the system in the three months since its implementation. The reputational risk of banks lending money to licensed moneylenders is a major obstacle to the system’s activation.

A financial sector official pointed out, "Considering that the licensed moneylending sector itself has shrunk due to the maximum interest rate reduction, active interest and will from financial authorities are needed to revitalize the Premier League system, which can help with funding costs."

There are also voices calling for attention to the retroactive application of the maximum interest rate to reduce the interest burden on vulnerable groups. Currently, the outstanding balance of credit loans exceeding the maximum interest rate among the top 20 licensed moneylenders amounts to about 4.2 trillion won. Jeon Jae-su, a Democratic Party lawmaker, said, "Efforts by licensed moneylenders for self-purification and attention from financial authorities are needed to ensure that low-income households do not bear interest burdens exceeding the maximum rate."

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