Shrinking Loan Business "Management Burden Increased 5 Times Due to Maximum Interest Rate Reduction"

Daebu Association Hosts Consumer Finance Conference
Domestic Loan Market Shrinks Due to Government and Financial Authorities' Regulations
Lowering Maximum Interest Rate Has 4.63 Times Greater Negative Impact on Cost Rate
Professor Seo Jiyong of Sangmyung University: "Differentiated Loan Industry Regulation Should Be Eased"

On the 10th, Im Seung-bo, Chairman of the Korea Consumer Finance Association (center), is delivering the opening address at the 'Consumer Finance Conference' held at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul. Photo by Song Seung-seop

[Asia Economy Reporter Song Seung-seop] A study has found that the reduction of the legal maximum interest rate has increased the operating burden of lending businesses by nearly five times due to higher loan costs. It is argued that the domestic lending market has also contracted significantly as profitability deteriorated sharply due to government and financial authorities' regulations. Since lending businesses, the last bastion of institutional finance, shrinking would push financially vulnerable groups toward illegal private loans, there are calls to establish policy and industrial escape routes.

On the 10th, the Korea Financial Services Association held the "12th Consumer Finance Conference" under the theme "Discussing the Survival, Innovation, and Growth Drivers of Lending Finance" at the Korea Chamber of Commerce and Industry's Members' Meeting Room in Jung-gu, Seoul. The conference was attended by 45 people, including 10 representatives of lending companies and academics.

The main topic of the conference was the contraction of the lending finance market. Im Seung-bo, president of the Korea Financial Services Association, pointed out, "The outstanding loan balance of lending businesses decreased by 3 trillion won over two years, and the number of users has almost halved compared to the peak at the end of 2015," adding, "There is a concern that illegal private loans may spread due to the deterioration of the supply function of financial services for ordinary citizens."

A research result also showed that the negative impact on lending companies' cost of funds (operating expense ratio) when the maximum interest rate was lowered was 4.63 times greater than if the rate had not been lowered. Professor Seo Ji-yong of Sangmyung University's Department of Business Administration, who presented the findings under the theme "Recent Status of Domestic Lending Businesses and Measures to Revitalize the Industry," analyzed, "Currently, lending businesses face deteriorating profitability and loan business conditions due to the reduction of the maximum interest rate, strengthened loan regulations, and the Financial Consumer Protection Act."

Shrinking Lending Businesses... "Excessive Regulations Need Adjustment"

Professor Seo also diagnosed, "After the maximum interest rate reduction, the increase in operating expense ratio further expanded the negative impact on the return on assets (ROA)," adding, "In particular, the negative effects of interest expense ratio and bad debt expense ratio have persisted for a considerable period." Accordingly, this has been a major factor in the significant decrease in the number of registered lending companies.

As a measure to revitalize lending businesses, he suggested easing differentiated regulations on lending companies. Professor Seo proposed, "If high-quality lending companies raise funds from banks, risk weights for banks could be lowered or preferential loan-to-deposit ratio measures could be applied," and "Online platform usage should be allowed for all lending companies, and lending products should be allowed to be sold on competitive big tech platforms."

Professor Ko Dong-won of Sungkyunkwan University Law School also viewed that excessive business regulations need to be revised for the development of debt purchase and collection businesses. Debt purchase and collection businesses buy loan receivables from existing financial companies and generate profits by collecting from borrowers. Professor Ko said, "The Consumer Credit Act significantly restricts companies' business capabilities and needs to be reconsidered," adding, "If the debt purchase and collection market shrinks, financial institutions cannot timely dispose of non-performing loans, so it is necessary to abolish collateral procurement ratio regulations."

Among experts participating as panelists, there were also claims that the unilateral interest rate reduction policy should be improved. Park Deok-bae, CEO of Financial Window, said, "The maximum interest rate should not be lowered step-by-step but discussed and decided by a council composed of academics and practitioners."

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