Loan Industry Unable to Operate Normally Even at Current 24% Rate
Savings Banks' Effective Interest Rates Already Below 20%
Financial Authorities Take Cautious Stance... "Reviewing Market Conditions"
[Asia Economy Reporter Kim Min-young] A bill to lower the statutory maximum interest rate to below 20% per annum was proposed just two days after the opening of the 21st National Assembly. This move addresses one of the biggest concerns of the lending and savings bank industries following the emergence of a super-majority ruling party.
According to political and financial circles on the 2nd, Kim Cheol-min, a member of the Democratic Party of Korea, took the lead in proposing amendments to the Interest Limitation Act and the Act on Registration of Credit Business and Protection of Finance Users (Credit Business Act) to reduce the current maximum interest rate from 24% to 20%, lowering it by 4 percentage points.
The amendment to the Interest Limitation Act lowers the maximum interest rate to 20% and stipulates that unless there is a special agreement between the parties, the total interest amount cannot exceed the loan principal.
Regarding the Credit Business Act, the current maximum interest rate is set at 27.9% per annum (24% or less according to the enforcement decree), which is higher than the Interest Limitation Act. The amendment aims to unify this by aligning it with the Interest Limitation Act at 20%.
Representative Kim explained, “Everyone is going through a difficult time due to the novel coronavirus disease (COVID-19), and with analyses suggesting that the economic growth rate may fall into negative territory due to the global crisis, I prioritized stabilizing the livelihood economy and prepared the first bill of the 21st National Assembly.”
The reduction of the maximum interest rate was a pledge of the Democratic Party in the 21st general election and also a campaign promise of President Moon Jae-in. Along with Kim, 12 ruling party lawmakers including Nam In-soon, Do Jong-hwan, Ahn Min-seok, Yoon Kwan-seok, and Hwang Hee signed the bill.
A similar bill was proposed in the 20th National Assembly but was discarded due to the end of the session. However, with the Democratic Party merging with the proportional representation party, the Together Citizens' Party, creating a ‘super-majority’ of 180 seats, the likelihood of passage this time is high.
The maximum interest rate was first set at 66% under the Credit Business Act in 2002, then lowered to 49% in 2007, 44% in 2010, and 39% in 2011. Subsequently, it was reduced every two years to 34.9% in 2014, 27.9% in 2016, and 24% in February 2018.
The lending industry, which will be directly affected by the reduction of the maximum interest rate, is in a state of ‘high alert.’ The industry fears that loans for low-credit borrowers will be blocked immediately. An industry official said, “If lending companies reduce loans while managing risks, low-credit borrowers will face a ‘loan cliff,’ and their only option will be illegal private loans.”
The industry claims that the lending market has already been devastated under the 24% maximum interest rate system. Following Sanwa Money, the industry leader that stopped new loans last year, Jo Credit Credit, ranked fourth, also ceased new loans starting January. According to the Credit Finance Association, among the 22 top companies reporting interest rates on unsecured loans to the association, six issued fewer than 10 loans in the first quarter, effectively suspending operations.
Savings banks argue that loan interest rates are sufficiently low even under the current maximum interest rate. An industry official said, “The personal credit loan interest rate dropped from 20.25% in February 2018 to 17.07% last April,” adding, “Further reduction of the maximum interest rate is meaningless.”
The financial authorities are taking a cautious stance. While there is no disagreement on policy coordination with the government and ruling party, they are concerned that a premature reduction could block funding for low-credit borrowers. In an October press briefing last year, Eun Sung-soo, Chairman of the Financial Services Commission, said, “If interest rates are artificially lowered and companies stop lending because business is not profitable, consumers will have to turn to the higher-interest private loan market,” and added, “The timing of lowering the maximum interest rate will be decided based on the financial market situation.”
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