[Insight & Opinion] The Unfairness of the 2 Trillion Won Fine Resulting from Financial Government Control

As the repayment of principal and interest on loans by self-employed individuals has emerged as a serious issue, financial authorities announced the ‘Banking Sector Livelihood Finance Support Plan,’ which uses approximately 2 trillion won?equivalent to 10% of the 2022 net income of 18 banks?instead of a windfall tax. Under this plan, self-employed individuals and small business owners with corporate loans exceeding an interest rate of 4% as of the end of 2023 will receive 850,000 won each.

Since this benefit will reach 1.87 million self-employed individuals, this measure holds significant meaning. Nevertheless, this plan lacks appropriateness and is not a valid financial policy. This self-employed support plan is a typical example of ‘government control.’ Although the financial authorities opposed the establishment of a ‘windfall tax’ and chose the form of cooperative finance, from the banks’ perspective, it is no different from paying a special fine of 2 trillion won. Banks, recognizing the difficult circumstances of self-employed individuals, are not only failing to receive praise from the public for contributing to cooperative finance for the national economy but are effectively paying a fine as they have been criticized by the president for ‘making self-employed people serve as slaves.’

Have banks ever dared to violate laws and guidelines to charge excessive interest rates? When the government requested financial support for self-employed individuals struggling due to the COVID-19 pandemic, did banks ever refuse? Even though banks handled self-employed loans as required by financial authorities, if banks profited excessively, the responsibility lies more with the financial supervisory authorities than with the banks.

During the COVID-19 period, banks supported self-employed individuals by extending maturities and deferring principal payments as directed by the government. If asked to extend maturities by five years, they did so; if asked to readjust interest rates, they complied accordingly.

If, as the president pointed out, self-employed individuals were paying exorbitant loan interest rates and thus serving as slaves to banks, then the problem lies in the loan interest rate system and loan management methods established by the Financial Services Commission and the Financial Supervisory Service. Therefore, this self-employed support plan exemplifies the extreme of financial government control.

Nonetheless, if this plan can extinguish the major crisis faced by self-employed individuals, it may be understandable given the urgency of the problem. But can this plan truly become a turning point in resolving the self-employed loan issue? The core of the self-employed loan problem lies in the oversaturation of self-employment and the long-term stagnation of the sector. Compared to the end of 2019, self-employed loans increased by 358 trillion won as of the end of June 2023. Among these, loans to multiple debtors increased by 274 trillion won. This shows that self-employed individuals have endured nearly 100 trillion won in debt annually over the three years of the COVID-19 pandemic, highlighting that the core issue in self-employed loans is the problem of multiple debtors.

Meanwhile, the total service industry index rose by 11.4% in October compared to four years earlier in October 2019, but the food and beverage retail sector, a representative self-employment industry, decreased by 27%. Although the self-employment market size shrank by approximately 20% compared to four years ago, the number of self-employed individuals increased by 25%, resulting in an estimated 25% decrease in sales per business.

As a result, despite government support measures after the end of the COVID-19 pandemic, the risk of loan defaults among self-employed individuals is significantly increasing. Moreover, due to ongoing low growth and polarization, the long-term prospects for improvement in the self-employment sector are slim. In other words, the problem of loan defaults among self-employed individuals is only just beginning.

Therefore, financial measures that do not involve structural adjustment of self-employment are mere stopgap solutions. In this regard, the role of the ‘New Start Fund’ is important, and banks’ contributions to cooperative finance should be directed toward expanding the ‘New Start Fund.’ In short, distributing 850,000 won in cash per person may be appropriate as a measure for next year’s general elections, but it is a wrong choice as a financial policy for self-employed individuals.

Kim Dong-won, Former Visiting Professor at Korea University

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