30-Day Illegal Private Loan Response Pan-Government Task Force Meeting
[Asia Economy Reporter Kim Jin-ho] Ahead of the statutory maximum interest rate reduction (24%→20%) taking effect from the 7th of next month, financial authorities have declared war on illegal private loans. The intention is to significantly strengthen monitoring and supervision to ensure that no consumers are driven to illegal private loans due to the maximum interest rate cut.
According to the financial sector on the 29th, the government will hold an inter-ministerial task force (TF) meeting to respond to illegal private loans on the 30th of this month. This meeting is organized to intensively crack down on the expansion of illegal private loans following the maximum interest rate reduction in the second half of the year and to strengthen inspections.
The statutory maximum interest rate reduction was a campaign pledge of President Moon Jae-in. After being lowered once from 27.9% to 24% in 2018, this is the second downward adjustment. While the intention to reduce the interest burden on low-income people is good, the possibility of illegal private loans expanding due to the maximum interest rate cut is raised as a concern. In particular, loan companies targeting low-credit borrowers are going into a state of suspended operation, raising concerns about a balloon effect toward illegal private loans.
According to financial authorities, among the 980,000 existing users of credit loans from licensed loan companies, about 310,000 people (approximately 2 trillion won) are estimated to be driven to illegal private loans due to the impact of the maximum interest rate reduction. President Moon Jae-in also urged at the Cabinet meeting in March, "Please strive to improve a more equitable financial structure so that low-credit borrowers are not driven to illegal private loans, etc."
Accordingly, on the 7th of next month, when the maximum interest rate reduction takes effect, the financial authorities will launch ‘Safety Net Loan II’ and ‘Hae-sal Loan 15’ for vulnerable groups. The Safety Net Loan is a product that refinances high-interest loans (over 20% per annum) to 17-19%. Hae-sal Loan 15 is a restructured product that lowers the interest rate by 2 percentage points from the existing Hae-sal Loan 17 (17.9% per annum).
In addition, they plan to provide guidance on new promotional methods of illegal private loans using social networking services (SNS) such as YouTube and to minimize damages. They also plan to expand free legal support and the debtor representative system for low-income people suffering from illegal debt collection.
Earlier, the Financial Services Commission submitted a ‘Loan Business Act Amendment’ to the National Assembly, changing the name of unregistered loan businesses to ‘illegal private loan operators’ and limiting the interest they can charge to 6%. According to the amendment, unregistered operations are punishable by imprisonment of up to 5 years or a fine of up to 100 million won, and violations of the maximum interest rate are punishable by imprisonment of up to 3 years or a fine of up to 50 million won.
Meanwhile, illegal private loans are becoming more rampant ahead of the statutory maximum interest rate reduction. There are cases of illegal advertisements on SNS and portals, as well as cases of impersonating low-income financial institutions to recommend loans. According to the Financial Supervisory Service, a total of 298,937 illegal loan advertisements were collected over the past year.
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