[Square] For the Success of the Premier League System in the Loan Business

Park Deok-bae, CEO of Geumyung Uichang

Since the 7th of last month, the statutory maximum interest rate has been reduced from 24% per annum to 20% per annum. While this will have a positive effect in alleviating the interest burden on low-income households, there are also concerns about negative consequences. This is because regulated financial institutions are raising lending thresholds and reducing the supply of funds to low-income borrowers, which raises serious concerns about an increase in users turning to illegal private loans.

Among regulated financial institutions, loan finance companies, which serve as the last line of defense for low-credit low-income households, are particularly sensitive to the reduction in the maximum interest rate. Whenever the maximum interest rate has been lowered in the past, loan finance companies have had no choice but to significantly reduce credit loans to low-income borrowers. News reports indicate that many large loan finance companies are even considering withdrawing from the market altogether due to the recent interest rate cut. As the legitimate loan finance market shrinks, the illegal private loan market inevitably expands. Even conservative financial authorities estimate that about 310,000 existing credit loan users may be unable to obtain loans from private financial companies due to this maximum interest rate reduction, and among them, approximately 39,000 may be pushed into illegal private loans.

In response, the government is exploring various follow-up measures. Among these, the most notable is the promotion of the Loan Finance Premier League system. This system aims to selectively identify excellent loan finance companies that operate legally and focus on providing financial services to low-income households, and to relax regulations for these companies to encourage the expansion of credit loans to low-credit low-income borrowers.

The Loan Finance Premier League system envisioned by the government mainly focuses on reducing funding costs for excellent loan finance companies serving low-income households and plans several regulatory relaxation measures. First, it recommends abolishing internal bank regulations that prohibit transactions with loan finance companies and promotes transactions through mutual agreements to reduce funding costs for loan finance companies.

Second, it aims to activate online brokerage by utilizing online loan brokerage platforms, which are currently unavailable for loans from loan finance companies, in order to reduce brokerage fees.

Third, when amending the Loan Finance Act in the future, it plans to reasonably adjust the level of sanctions for minor violations such as delays in registration changes or calculation errors to reduce excessive costs, and to relax loan regulations such as increasing total asset limits to enhance funding flexibility.

Moreover, as sound business practices become established, additional improvements such as using separate names distinct from loan finance companies, partially charging early repayment fees, and expanding expense calculations will be further reviewed and discussed. Plans are also being made to supply policy financial products that utilize the accessibility of excellent loan finance companies to low-income households.

The government's introduction of the Loan Finance Premier League system is considered desirable for fostering a healthy short-term financial market for low-income households. Once this system is established, business activities centered on sound and excellent loan finance companies will be revitalized, stabilizing the short-term financial market for low-income households. Furthermore, if Premier League loan finance companies, savings banks, and capital companies compete by leveraging their respective strengths, the domestic short-term financial market for low-income households is expected to operate more competitively and efficiently.

For this system to be successfully established, first, the firm will and execution of financial authorities are crucial. It should not be a temporary appeasement or stopgap measure for loan finance companies following the maximum interest rate reduction. Above all, the government must change its perception of the role of the short-term small loan market. Also, to ensure the stable continuation of the Premier League system, the participation of private experts in selecting excellent low-income financial loan companies should be considered.

Second, among various regulatory measures, bank loans to loan finance companies will be the hottest issue. Although administrative guidance on loan regulations for banks lending to loan finance companies was abolished in 2016, some banks still explicitly prohibit transactions with loan finance companies through internal regulations citing reputation management and other reasons. Therefore, to encourage voluntary participation by banks in the future, not only is the guidance effort of financial authorities important, but banks lending to excellent loan finance companies should also be considered for additional points in low-income financial services.

Third, amid the growing difficulties faced by low-income households due to the aftermath of COVID-19, there is no need to hesitate if the mid- to long-term plans of financial authorities aim to foster sound and excellent loan finance companies. In particular, the renaming of loan finance companies should be expedited. The term "loan finance" itself is a common noun. Banks, savings banks, loan finance companies, illegal private loans?all these lending institutions can be said to engage in loan finance. Most people cannot easily distinguish between registered legitimate loan finance companies and illegal private loans, so if consumers can distinguish between illegal private loans and registered loan finance companies themselves, it is expected to have an unexpected positive effect.

Only excellent low-income financial loan companies selected within the Premier League system should be allowed to use the designation "consumer credit business" at a minimum to protect financial consumers from illegal private loans.

Park Deok-bae, CEO of Financial Window