[Loan Cliff for the Common People] Political Circles Ahead of the Presidential Election "Lower the Maximum Interest Rate to the 10% Range"

Gyeonggi Governor Lee Jae-myung "Legal Interest Rate for Loan Companies 11%"
Assemblyman Min Hyung-bae Also Proposes Bill to Lower Annual Interest Rate to 15%

[Asia Economy Reporter Kim Hyo-jin] Despite concerns about the reduction of the legal maximum interest rate, the political sphere is fueling further cuts, intensifying the controversy. In particular, these claims are repeatedly made mainly by leading presidential candidates and ruling party figures, raising concerns that 'populism' is already emerging ahead of next year's presidential election.

According to financial and political circles on the 14th, Lee Jae-myung, the leading presidential candidate within the Democratic Party of Korea and Governor of Gyeonggi Province, argued last month on his Facebook account that the legal interest rate for loan companies should be lowered to the 11% range. He stated, "The base interest rate is 0.5%, but forcing ordinary people to pay 20% interest just because they are poor goes against the spirit of the constitution." Lee added, "If every citizen is given the opportunity for a long-term loan of up to 10 million won at an annual rate of around 2%, the interest difference corresponding to 18% would be used to improve the welfare of the people rather than fattening loan companies."

Min Hyung-bae, a Democratic Party lawmaker on the National Assembly's Political Affairs Committee, has introduced the 'Partial Amendment to the Interest Restriction Act' and the 'Partial Amendment to the Act on Registration of Loan Business and Protection of Financial Users,' which set the maximum interest rate as the lower of 15% per annum or 20 times the base interest rate. Currently, with a base interest rate of 0.50%, 20 times equals 10.0%. The intention is to cap the maximum interest rate at around 10%. Other lawmakers from the same party, including Kim Nam-guk, also proposed an amendment to the Interest Restriction Act last year to set the maximum interest rate not to exceed 10% per annum by presidential decree.

Maximum Interest Rate in the 10% Range?..."No Precedent Worldwide"

The financial market expresses concerns that a sudden reduction in the maximum interest rate could cause greater side effects. In particular, the loan industry strongly opposes the 10% annual rate, stating that such a rate is unprecedented worldwide. In fact, major foreign countries with a longer history of financial industries than Korea, such as the United States, Germany, China, and Taiwan, have no maximum interest rate limits. The UK operates a maximum interest rate policy at 288%, France at 29.3%. Japan manages it at an annual rate of 20%, and for peer-to-peer loans, at an annual rate of 109.5%. Singapore's rate is 48%.

Financial authorities are also negative about a sudden reduction in the maximum interest rate. They believe that if not everyone benefits, people will inevitably turn to illegal private loans. Financial Services Commission Chairman Eun Sung-soo said at last year's National Assembly Political Affairs Committee plenary meeting regarding Lee Jae-myung's call to lower the legal maximum interest rate to 10%, "The government authorities should make efforts to reduce interest rates," but added, "I think it would be difficult to lower it so drastically (to 10%)."

A financial industry official said, "The idea of allowing ordinary people to borrow money at low interest rates is not bad in itself," but pointed out, "The problem is that the intention to help vulnerable borrowers may actually push them into blind spots." The official also said, "The maximum interest rate policy requires a long-term and cautious approach based on an overhaul of the entire financial structure," adding, "Words that are easy to say and sound good right now could actually be poison."