"520,000 Low-Credit Borrowers Excluded Due to Maximum Interest Rate Reduction... Need to Introduce Linked Maximum Interest Rate"

Analysis of Financial Sector Exodus Exceeding 9 Trillion Won

The Korea Credit Finance Association urged the introduction of a ‘linked maximum interest rate system,’ claiming that the reduction of the legal maximum interest rate has intensified the withdrawal of low-credit borrowers from the financial sector.

On the 25th, the Credit Finance Association held a 'Consumer Finance Conference' and made this claim. Lim Seung-bo, chairman of the Credit Finance Association, explained, “The number of users of loan businesses has decreased by 200,000 to 300,000 annually due to the reduction of the legal maximum interest rate,” adding, “Since 2016, the number of loan business users has decreased by 1.7 million over seven years.” The Financial Services Commission lowered the legal maximum interest rate from 24% to 20% per annum in 2021.

Professor Kim Sang-bong of Hansung University’s Department of Economics also stated, “Due to the reduction of the maximum interest rate, the size of credit loans in the loan business decreased by 5.6 trillion KRW and the number of loan users decreased by 1.48 million from 2017 to 2022 over five years,” explaining, “The fixed legal maximum interest rate system has acted as a factor worsening financial accessibility for low-credit borrowers.” Professor Kim estimated that when the maximum interest rate was lowered from 24% to 20%, the number of low-credit borrowers excluded from the financial sector was 523,000 (29,000 in banks, 488,000 in non-banks), and the excluded loan amount was approximately 9.3 trillion KRW.

The need to improve the legal maximum interest rate system was also mentioned. Chairman Lim said, “Despite the rise in the base interest rate, the ceiling of the maximum interest rate has blocked new loans in the microfinance sector, leading to an extreme situation,” adding, “There is a need to introduce a linked maximum interest rate system that can flexibly respond according to market conditions.” Professor Kim also emphasized, “Countries that apply the linked maximum interest rate system can flexibly cope amid rapidly changing market environments.”

The linked maximum interest rate system limited to the loan business, proposed by Professor Kim, is a method where a public-private joint interest rate determination committee consisting of the government, industry, and academia calculates the base interest rate linked to the financial bond interest rate and adds a margin rate based on factors such as bad debt cost rate, recruitment cost rate, and management cost rate.

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