[Financial Essay] Is a Maximum Interest Rate of 20% Truly Justice?

[Asia Economy Reporter Kim Min-young] Is the maximum interest rate of 20% per annum truly just?

On the 1st, just two days after the opening of the 21st National Assembly, a bill was proposed to lower the statutory maximum interest rate to 20% or below.

According to financial and political circles, Kim Cheol-min, a member of the Democratic Party of Korea, has taken the lead in proposing a partial amendment to the Interest Limitation Act and the Act on Registration of Credit Business and Protection of Finance Users (Credit Business Act), which lowers the current maximum interest rate from 24% to 20%, a 4 percentage point reduction.

Lawmaker Kim explained the purpose of the bill as “aiming to stabilize the economic life of the people.”

The reduction of the maximum interest rate is a pledge of the Democratic Party for the 21st general election and a campaign promise of President Moon Jae-in. Along with Kim, 12 ruling party lawmakers including Nam In-soon, Do Jong-hwan, and Ahn Min-seok have signed the bill.

The interest rate reduction is a major livelihood bill of the ruling party, and it is highly likely to pass in this National Assembly.

The maximum interest rate was first established 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 to 34.9% in 2014, 27.9% in 2016, and 24% in 2018.

The credit industry complains that if the maximum interest rate is lowered again, registered credit businesses within the system will find it difficult to continue operations. Following Sanwa Money, the industry leader that stopped issuing new loans last year, Jo Credit Credit, ranked fourth, also ceased new loans this year. According to the Credit Finance Association, among the top 22 companies, six issued fewer than 10 loans in the first quarter, effectively suspending operations.

According to the Financial Supervisory Service, about 2 million people use credit businesses. The outstanding loan balance reached 16.7 trillion won as of the end of June last year. The credit industry estimates that if the maximum interest rate is lowered, 10-20% of users, about 200,000 to 400,000 people, will no longer be able to borrow from credit businesses. Where will these people turn to borrow money? According to a survey by the Credit Association, the number of users of illegal unregistered credit businesses reached 430,000 (as of 2016).

There are voices saying the government should lend money directly.

However, in reality, many people with income, existing loans, loan delinquencies, some assets, or family assets are unable to receive policy financial products and welfare benefits. It is time to consider whether the simple solution of lowering the maximum interest rate might instead push financially desperate low-income people into illegal private loans.