Financial Authorities Consider Introducing 'Market-Linked Interest Rates' Amid Side Effects of Maximum Interest Rate Reduction

[Asia Economy Reporter Song Hwajeong] As interest rates continue to rise and the statutory maximum interest rate is capped at 20% per annum, the difficulties faced by vulnerable borrowers are increasing. In response, financial authorities are considering the introduction of a market-linked interest rate to flexibly adjust the maximum interest rate.

According to financial authorities on the 14th, the Financial Services Commission is gathering expert opinions and reviewing overseas cases regarding the plan to link the statutory maximum interest rate to market interest rates.

The FSC is examining cases of European countries that have adopted market-linked maximum interest rate systems. In France, the maximum interest rate ceiling is set at 133% of the previous quarter's average market interest rate, while in Italy it is set at 150% of the average market interest rate.

An FSC official explained, "The statutory maximum interest rate requires the consent of the National Assembly," adding, "We are reviewing various measures to improve financial accessibility for low-income people."

Since the enactment of the Loan Business Act in October 2002, the maximum interest rate system has adopted a fixed ceiling approach. The current Loan Business Act stipulates that the maximum interest rate should be set within 27.9% per annum by presidential decree. During the Moon Jae-in administration, to reduce the burden on high-interest borrowers, the enforcement decree was revised to lower the maximum interest rate from 24% to 20% per annum in July last year.

However, with the recent rise in the base interest rate, loan companies have reduced or suspended lending to vulnerable groups due to soaring funding costs and strengthened risk management, causing these vulnerable groups to be excluded from the formal financial system. This has led to increasing calls for improvement.

Kim Miru, a research fellow at the Korea Development Institute (KDI), stated in a recent report titled "The Necessity of Introducing a Market-Linked Statutory Maximum Interest Rate," "As the base interest rate rises, the funding costs for credit card companies and other lenders increase even faster. When funding costs rise, households that were subject to interest rates close to the statutory maximum interest rate are excluded even from card companies and capital companies, significantly lowering the welfare of vulnerable groups."

According to the report, reflecting the 3.5 percentage point increase in the funding cost of secondary financial institutions (the interest rate at which financial companies raise funds for household loans) from the end of last year to November this year, if the linked statutory maximum interest rate rises from 20% to 23.5%, approximately 1.02 million borrowers, accounting for 96.9% of about 1.06 million borrowers who were excluded under the fixed statutory maximum interest rate, would be able to participate in the loan market.

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