[Initial Insight] Government Pushing Financially Vulnerable Groups to the Brink

[Asia Economy Reporter Kwangho Lee] "After being rejected for loans from the 1st financial sector (commercial banks) and the 2nd financial sector (savings banks, capital companies, mutual finance, etc.), I was at a loss, but private loans saved me." This was a remark made by the owner while drinking with friends at a regular pub a short time ago, saying he would close the business this month. Kim Geon-young (44, pseudonym), who has been running a pub in Yeonnam-dong, Mapo-gu, Seoul for 13 years, showed tears, saying that private loans reached out to him in difficult times. Kim said, "I also inquired about government policy financial products for low-income earners such as the Sunshine Loan, but I could not get a loan due to strict eligibility requirements," and expressed his frustration, saying, "I can no longer afford operating expenses such as labor costs, rent, and management fees, so I will close the business on the 31st of this month."

The government’s tightening of household loans to curb soaring housing prices is pushing financially vulnerable groups toward private loans. Due to the financial authorities’ loan regulations, high-credit borrowers are flocking to savings banks, capital companies, mutual finance, etc., which are mainly sought by those with relatively low credit scores. This is a balloon effect caused by restrictions on commercial bank loans.

Some mutual finance institutions have already suspended household loans. At the end of last month, Saemaeul Geumgo suspended loans related to home purchases, and ShinHyup temporarily halted new household loans such as unsecured loans and mortgage loans. As commercial bank loans became restricted, prospective borrowers flocked to mutual finance institutions, raising concerns that the total household loan management target (4.1%) might be exceeded. The situation is similar for savings banks and capital companies.

The legal loan limit that financially vulnerable groups rejected by the 2nd financial sector can turn to is loan companies, but this is also a narrow door. Since the statutory maximum interest rate was lowered to 20% in July, loan companies have tightened their loan screening due to deteriorating profitability. Some loan companies have even returned their loan business licenses, saying "there is no future anymore."

This is why financially vulnerable groups urgently needing funds are massively pushed toward private loans. The financial authorities have already estimated that about 39,000 people might use private loans due to the reduction of the statutory maximum interest rate. In fact, when the statutory maximum interest rate was lowered to 24% per annum in 2018, about 50,000 people were pushed out of the formal financial sector and turned to private loans.

However, the current situation is different from that time. Small business owners and self-employed people are driven into a dead end due to strict social distancing measures amid COVID-19. Some self-employed people opposing the government’s quarantine guidelines even held a "lights-out protest" on the evening of the 27th, turning off their signboards and ceasing evening business.

Moreover, some people despairing of their situation have taken their own lives. In January, a gym owner in Daegu, and on the 21st, a Chinese restaurant owner in Jamsil, Seoul, made extreme choices. Recently, a self-employed person in his 50s who had run a restaurant in Mapo, Seoul for 23 years ended his life after using the deposit from his single-room residence to pay monthly rent.

The government’s tightening of loans may be a decisive measure to establish loan handling based on repayment ability. However, it cannot escape criticism that consideration for financially vulnerable groups has been insufficient. Unless more sophisticated household debt measures and practical solutions to loan problems for financially vulnerable groups are introduced, the cries of the financially vulnerable will inevitably grow louder.

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