KDI "Lowering Legal Maximum Interest Rate Hurts Vulnerable Borrowers... Should Link to Market Interest Rates"

[Asia Economy Sejong=Reporter Son Seonhee] There are concerns that lowering the statutory maximum interest rate during a period of interest rate hikes could, contrary to its intent, push low-income vulnerable borrowers into non-institutional financial markets, causing harm. Accordingly, there are calls for the statutory maximum interest rate to be linked and adjusted in accordance with market interest rates.

Kim Miru, a research fellow at the Korea Development Institute (KDI), made this suggestion in a report titled "Operational Measures for the Statutory Maximum Interest Rate to Include Vulnerable Groups During Interest Rate Hikes," published on the 26th.

Generally, the funding costs of financial institutions move in line with market interest rates. In contrast, the statutory maximum interest rate on loans is strictly fixed at 20%. Regarding this, Research Fellow Kim pointed out, "When funding costs rise, the spread between the statutory maximum interest rate and funding costs decreases, and as a result, households that were subject to interest rates close to the statutory maximum may be excluded from the loan market."

This issue is particularly significant because households borrowing at interest rates close to the statutory maximum tend to have low income levels. According to the report, among households using high-interest credit loans with rates between 18% and 20%, 84.8% are vulnerable households. In other words, when funding costs increase, vulnerable households with low income or low credit ratings are more likely to be pushed into private lending or non-institutional financial markets.

An analysis of the effects of lowering the current statutory maximum interest rate of 20% by 2 percentage points to 18% showed that approximately 659,000 borrowers would no longer be able to obtain loans from secondary financial institutions and would be pushed into private lending or non-institutional finance due to the reduction in the statutory maximum interest rate. The amount of their credit loans is about 5.9 trillion won, and when combined with mortgage loans and other loans, it reaches 33.2 trillion won. If these borrowers are not incorporated into policy finance, it implies that 33.2 trillion won in delinquencies could occur.

Research Fellow Kim stated, "There are limits to resolving the side effects of rising funding costs through policy finance," and suggested, "It is necessary to introduce a linked statutory maximum interest rate system." He also added, "Separate from the introduction of a linked statutory maximum interest rate system, discussions on the appropriate level of the statutory maximum interest rate should continue."

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