"Raising the Legal Maximum Interest Rate is Needed to Ease Loans for Ordinary People"… Financial Services Commission to Persuade the National Assembly

Locking the Door on Loans from Savings Banks, Card Companies, and Loan Agencies
Issues Arise for Low-Credit Borrowers with Emergency Funds Cut Off
Financial Services Commission Considers Raising Maximum Interest Rates or Introducing Linkage System as Alternatives

[Asia Economy Reporter Sim Nayoung] As the 'paradox of the statutory maximum interest rate,' which blocks the financial lifeline of ordinary people during the interest rate hike period, disrupts the financial market, the financial authorities are set to persuade the National Assembly. In January next year, after completing the presidential New Year's work report, the Financial Services Commission (FSC) plans to explain the statutory maximum interest rate amendment proposal to the leadership of both ruling and opposition parties and members of the National Assembly's Political Affairs Committee.

The FSC proposes two main alternatives. A senior official from the FSC said, "One way is to raise the current statutory maximum interest rate of 20% (within the 27.9% limit set by the Loan Business Act), and another option is a linked statutory maximum interest rate system that fluctuates according to market interest rates," adding, "Even if the political circles do not support the adjustment plan, at least they should not oppose it for the system to be revised."

Amendment of the Enforcement Decree of the Loan Business Act Requires 'Tacit Consent' from the National Assembly

There are still strong voices in the National Assembly calling for lowering the statutory maximum interest rate. In the opposition party, Representative Lee Jae-myung proposed a bill in July this year, and in the ruling party, Representative Seo Il-jun proposed a bill last December to lower the maximum interest rate or invalidate interest contracts exceeding the maximum interest rate. These were all proposed before the phenomenon where secondary financial institutions completely cut off credit loans to low-credit borrowers, blocking their financial lifelines, occurred.

Since the second half of this year, the funding costs for financial companies have risen sharply, but savings banks, card companies, and loan companies that cannot raise loan interest rates above 20% have faced a reverse margin crisis. Because of this, as the new year approaches, they have locked the loan doors, blocking all emergency funding sources for ordinary people. This is also why the FSC is trying to persuade the National Assembly.

To raise the statutory maximum interest rate, the Enforcement Decree of the Loan Business Act must be amended. Although the government can usually revise the enforcement decree independently, interest rates are a sensitive issue, and even when the statutory maximum interest rate was lowered in November 2020, it was done with the National Assembly's approval. Therefore, tacit consent from the political circles is necessary this time as well. A senior FSC official said, "If we can persuade the National Assembly, the enforcement decree is easier to amend than the law, so we could raise the statutory maximum interest rate within a month or two."

Introducing a Linked System Could Rescue 1.02 Million Borrowers

A study has shown that introducing a linked statutory maximum interest rate system that changes according to market interest rates would have a positive impact on vulnerable groups. Last month, the Korea Federation of Credit Finance Companies released a report titled 'The Necessity of Introducing a Market Interest Rate-Linked Statutory Maximum Interest Rate.'

Reflecting the actual situation where the secondary financial sector's funding costs rose by 3.5 percentage points from the end of last year to November this year (3-year AA+ card bonds rose from 2.37% to 5.87%), the study investigated the results if the linked statutory maximum interest rate had risen from 20% to 23.5%. Under the fixed statutory maximum interest rate, about 1.06 million borrowers, corresponding to 96.9% or 1.02 million borrowers, who were excluded from the market, could participate in the loan market under the linked statutory maximum interest rate system.

The report also emphasized that households borrowing at the statutory maximum interest rate are mainly vulnerable households (households in the bottom 20% income bracket according to the National Tax Service or with credit scores in the bottom 20%) and multiple debtors (borrowers who have borrowed from three or more financial institutions).

According to data from domestic credit rating agencies as of June, only 8.9% of households using low-interest credit loans below 4% were vulnerable households, whereas 84.8% of households using high-interest credit loans close to the statutory maximum interest rate (18-20%) were vulnerable households. About 10.8% of households using loans below 4% were multiple debtors, while 48.6% of households using high-interest loans were multiple debtors.

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