Loan Industry Faces Shutdown of 37 Companies Already... Will Lack of Regulation Awareness and Illegal Business Practices Be Eradicated? (Comprehensive)

208 Loan Companies Sanctioned Last Year Face Continued Penalties This Year
Some Exceed Overdue Limits or Suffer Capital Erosion, Leading to Severe Sanctions
If Legal Maximum Interest Rate Drops 20% in Second Half, Closures and Evasive Practices May Increase

[Asia Economy Reporter Song Seung-seop] Following last year, this year as well, a surge of lending companies have been disciplined by financial authorities due to poor management and illegal activities. It is expected that as profitability deteriorates due to the reduction of the legal maximum interest rate, the tendency to rely on illegal practices for survival will deepen, leading to an increase in disciplinary cases.

According to the Financial Supervisory Service (FSS) on the 8th, a total of 37 lending companies have been sanctioned by financial authorities so far this year. This is analyzed as a result of a large-scale investigation conducted in 2019, which has led to a surge in disciplinary cases.

Frequent Violations of Change Registration Obligations and Report Submissions... Exceeding Delinquent Interest or Capital Erosion

Most disciplinary reasons stemmed from insufficient understanding of regulations, such as lending companies failing to comply with the obligation to register changes or violating report submission standards. According to the Act on Registration of Credit Business and Protection of Financial Consumers, companies that did not register changes in executives or business locations with the FSS within 15 days, or failed to submit regularly required business status reports, totaled 34 cases (including duplicates).

There were also signs of evasive operations, such as repeatedly changing executives and business locations multiple times within a short period without notifying authorities. One lending company replaced five executives over about a year in periods ranging from 2 to 6 months. The location of its field offices was changed three times within 8 months without notification. Another lending company was caught changing executives, names, and locations five times and received a severe disciplinary action of institutional caution.

Illegal practices such as violating the upper limit on delinquent interest rates or excessively increasing assets were also found to persist. Another lending company was found to have entered into lending contracts worth 33.733 billion KRW exceeding the upper limit on delinquent interest rates for 268 debtors.

The company also violated the 'prohibition of excessive lending' clause, which restricts loans beyond the objective repayment ability by assessing the income and assets of the counterparties. Loans executed without income and asset verification documents amounted to 13.473 billion KRW.

Three companies were detected to have increased total assets beyond the legal limit of 10 times their equity capital, resulting in capital erosion. One company that expanded total assets up to 26.5 times received a severe disciplinary action of a six-month full business suspension and a reprimand warning for one executive.

There were also companies that concluded contracts by mediating money from unregistered lending brokers. According to the Lending Business Act, lending companies cannot receive or lend money to counterparties through unregistered lending brokers. Nevertheless, one company handled 22.228 billion KRW received from unregistered lending brokers to 231 people and was fined 5 million KRW and received a disciplinary recommendation equivalent to executive dismissal.

Shrinking Lending Market, Will Disciplinary Cases Surge Among Lending Companies?

Regarding the flood of sanctions in the lending industry, there are coexisting views that the detection of unskilled work and illegal operations will establish sound business practices, and that the worsening profitability of lending companies will lead to a surge in sanctioned companies.

An FSS official said, "We have periodically conducted audits before and will continue to do so as there have been financial-related incidents," adding, "The basic purpose is to protect investors and consumers through audits."

Some point out that with the legal maximum interest rate being lowered to 20% in the second half of the year, companies with deteriorated profitability may report closures or engage in new evasive operations, causing a balloon effect. This is why there are concerns that various malpractices may repeat despite large-scale audits.

Among sanctioned companies, those that have not produced business results for six months or appear to be effectively closed due to unknown locations already account for 21%. According to the Financial Supervisory Service’s lending industry status survey announced last December for the first half of the year, the lending balance of the lending industry was 15.0431 trillion KRW, a 5.5% decrease from six months earlier (15.917 trillion KRW). Large lending companies with assets over 10 billion KRW are experiencing shrinking operating profits or halting new loans.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "The reduction of the maximum interest rate is a policy necessity to prevent vulnerable financial groups from being driven to high interest rates," but advised, "If the rate drops to 20%, malpractices centered on lending companies may occur, so supplementary measures should be prepared."