Ahead of the presidential election, another push to lower the maximum interest rate... Will the gate to illegal loan hell open?

Loan Difficulties Due to Excessive Rate Cuts
Possible Collapse of Institutional Lending Industry
Criticism of Populism for Presidential Election Purposes

[Asia Economy Reporter Sung Ki-ho] Concerns are growing over the ruling party's push to further lower the statutory maximum interest rate, due to the excessively rapid pace and the significant side effects expected in the financial market.

While there is agreement on the intention to reduce the interest burden on low-income, low-credit, and vulnerable groups, critics point out that a sharp reduction in the maximum interest rate could inevitably push these groups into illegal private loans. An unreasonable interest rate cut could raise the loan barriers at savings banks and mutual finance institutions mainly used by ordinary people, potentially leading to the collapse of the regulated lending market. In particular, there are criticisms that this is a typical populist policy aligned with the ruling party's presidential candidate's financial pledges.

According to the National Assembly's legislative information system on the 24th, since the ruling party and the government agreed last November to lower the rate to 20%, a total of 13 interest reduction bills have been proposed. Among them, six are amendments to the "Act on Registration of Loan Business and Protection of Financial Users," and seven are partial amendments to the "Interest Restriction Act." All the bills aim to reduce the current statutory maximum interest rate of 20% to between 10% and 15%.

The rationale is to ease the interest burden on ordinary people due to the prolonged COVID-19 pandemic. The problem lies in the excessive speed and scale of the reduction. The statutory maximum interest rate was lowered by 4 percentage points from 24% to 20% on July 7. Despite side effects already emerging in various places, the ruling party is pushing for a significant reduction in less than half a year.

If the regulated financial sector shrinks, financially vulnerable groups in urgent need of funds will inevitably be pushed into illegal private finance. The Financial Services Commission warned that about 39,000 people (2.3 trillion KRW) might resort to illegal private loans due to the interest rate cut. In fact, when the statutory maximum interest rate was lowered to 24% in 2018, about 50,000 people were unable to obtain loans from the regulated financial sector and were pushed into illegal private finance.

Lee Yong-jun, senior expert at the National Assembly's Political Affairs Committee, pointed out, "Loan companies may reduce loans to relatively risky low-credit borrowers to maintain profitability, which could decrease new funding opportunities for low-credit borrowers," adding, "The difficulty in operating loan businesses due to the interest rate cut may lead to the underground operation of small loan companies, expanding illegal private finance."

The loan business, considered the 'last bastion' of financial services for ordinary people, is closing down one after another or planning to do so after the maximum interest rate cut. This is because the cost of bad debts has sharply increased, causing negative margins.

Within the financial sector, there are opinions that it will be difficult to lower the statutory maximum interest rate again. According to the Korea Credit Finance Association, among eight companies including seven major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) and NH Nonghyup Bank, the average card loan interest rates of five companies rose in October compared to the previous month. Notably, in October, only Lotte and Woori Card had average interest rates exceeding 14%, but last month, Samsung, Hyundai, and KB Kookmin were added, making a total of five companies. The proposed 15% reduction is already nearly reached. Interest rates in other secondary financial sectors such as savings banks are also soaring.

Some argue that this is populism aimed at winning votes in the March presidential election next year by emphasizing interest relief for ordinary people. Lee Jae-myung, the ruling party's presidential candidate leading the push for further statutory maximum interest rate cuts, is the main instigator of the interest rate reduction. Earlier this year, Lee said, "The final bastion for financially excluded groups should be the state, not loan companies," and "According to a study released earlier this year by the Korea Development Institute, the appropriate level for the statutory maximum interest rate is about 11.3% to 15.0%."

A financial industry official emphasized, "The financial industry is greatly influenced by regulations and is often used by politicians to win votes," adding, "Given the COVID-19 situation, it would be more effective to seek measures to stabilize the economic lives of ordinary people rather than focusing on vote-catching."

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