[Ark of the Lowest Credit Borrowers]③ Limits of Policy Finance... Need to Revise Statutory Maximum Interest Rate

Legal Maximum Interest Rate Cut Dries Up Funding for Lowest Credit Borrowers
Secondary Financial Sector Completely Closes Loan Doors
Financial Services Commission Advocates Raising Legal Maximum Interest Rate, but National Assembly Opposes

Illegal business card-type flyers from loan companies found in a traditional market in Seoul. (Photo by Jeong Jun-young)

The drying up of funding sources for the lowest credit borrowers during the interest rate hike period is largely attributed to the reduction of the legal maximum interest rate, according to insiders in and outside the financial sector. Savings banks and loan businesses are currently allowed to charge interest rates up to 20% per annum. On the 10th, a representative from a savings bank stated, "Due to the recent base rate hikes, the funding cost for loans has increased, and with the economy worsening and delinquency rates rising, we have no choice but to conduct lending operations conservatively to reduce risk. At the 20% legal maximum interest rate, it is impossible to provide loans to the lowest credit borrowers."

Within and outside the financial industry, there is an opinion that lowering the legal maximum interest rate is the way to prevent the lowest credit borrowers from turning to private loans. This is because it is difficult to absorb the loan demand of the lowest credit borrowers solely through policy finance. The context is that secondary financial institutions such as credit card companies and capital companies need to adjust interest rates as necessary to lend urgent funds to the lowest credit borrowers.

Lee Su-jin, Senior Research Fellow at the Korea Institute of Finance, said, "Since the legal maximum interest rate was lowered from 24% to 20% per annum in 2021, at least 18,000 to as many as 38,000 people have been pushed out of the loan market and driven into illegal private financing," adding, "Since the second half of last year, the loan sector has stopped issuing new loans and reduced loan supply, raising concerns about the increase in illegal private financing inflows." This figure is similar to the 39,000 increase in illegal private financing users following the maximum interest rate reduction announced by the Financial Services Commission, and the 38,000 increase in illegal private financing users following the 2018 maximum interest rate reduction found in tracking investigations by the Financial Services Commission and the Financial Supervisory Service.

Financial authorities also attempted to persuade the National Assembly in January this year as the 'paradox of lowering the legal maximum interest rate' disrupted the financial market. There were two proposals: raising the current 20% legal maximum interest rate to 27.9% as stipulated in the Loan Business Act, and introducing a linked legal maximum interest rate that fluctuates up and down according to market interest rates.

However, opposition was strong in the National Assembly, causing the proposals to fail at that time, and this stance remains, making it difficult to adjust the legal maximum interest rate. A member of the ruling People Power Party on the Political Affairs Committee said, "Interest rates are currently falling, so this is not the time to discuss adjusting the legal maximum interest rate," adding, "The opposition party is calling for lowering interest rates, so proposing to raise the legal maximum interest rate is not politically appropriate."