[The Trap of Illegal Private Loans]② Saving Low-Credit Borrowers... How to Prevent the Collapse of Legal Loan Businesses

Raise the Legal Maximum Interest Rate or Lower Funding Costs
Political Circles Oppose Unconditionally, Fearing Vote Loss

Strangling Loan Businesses Only Fuels Illegal Private Lending
After 20 Years of Legalizing Loan Businesses, Underground Economy Thrives Instead

To prevent low-credit borrowers in the bottom 20% of credit scores from falling into the trap of illegal private loans, it is essential to first prevent the collapse of licensed lending companies. This means establishing a systemic foundation to ensure that legitimate lending companies absorb as much of the loans to ordinary citizens as possible.

The lending industry points to two solutions. One is for the political sphere to raise the legal maximum interest rate (currently 20%), and the other is to lower the funding cost to reduce the operating expenses. Since the National Assembly has firmly ruled out raising interest rates, the first option is practically off the table. There are also side effects that financial authorities worry about. A Financial Supervisory Service official said, "Large lending companies uniformly apply the same interest rate regardless of the customer's credit rating," adding, "Therefore, if the legal maximum interest rate rises, the interest rates for existing customers could also increase accordingly."

Commercial Banks Reluctant to Provide Funding to Lending Companies

What about the second option? On the 29th of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, said, "We are exploring ways for excellent lending companies to secure some of their credit through banks." Lending companies currently procure loan funds from savings banks and capital companies at annual interest rates of 9-10%. However, the plan is to find ways to open the path for excellent lending companies to raise funds from commercial banks at much lower interest rates. Lowering the cost of funds would make it easier for lending companies to operate without having to raise the maximum interest rate.

Earlier this year, financial authorities also arranged meetings to facilitate transactions between commercial banks and lending companies. Even then, commercial banks showed reluctance to lend money. A representative from the Korea Financial Services Association said, "In 2018, KDB Capital, a subsidiary of the Korea Development Bank, and IBK Capital, a subsidiary of Industrial Bank of Korea, lent funds to excellent lending companies," adding, "However, during the National Assembly audit that year, they were criticized for being funding sources for lending companies, which caused difficulties. It seems banks prefer to avoid criticism by not getting involved."

Wanting to Change the Name to 'Consumer Credit Business' at Least

Due to the stereotype that "lending companies = loan sharks," lending companies are trying to change even the name "lending business." Related legislation has been proposed in the National Assembly. In 2021, Park Soo-young, a member of the People Power Party, stated, "The law prohibits the use of the term 'loan' except by registered lending companies, but in reality, illegal financial businesses also use the term 'loan,' making it difficult to prevent financial consumers from suffering damages from illegal financial use." She proposed an amendment to the Lending Business Act to allow excellent lending companies to use the term "consumer credit."

However, only a few understand the lending industry's position, and most of the pending lending-related bills are aimed at cracking down. They mostly call for further lowering the maximum interest rate to 13% or strengthening the registered lending companies' capital requirements to 30 million KRW to eradicate small-scale lending businesses.

Financial authorities are primarily concerned. A Financial Services Commission official said, "Most lending companies are closing because they cannot break even charging interest only up to the legal maximum of 20%. If regulations tighten, lending companies will withdraw their registration and operate illegally," adding, "Currently, since they are registered, the government can at least conduct inspections, but unless police forces monitoring illegal private loans are increased severalfold to catch all offenders, the damage will only worsen."

A lending industry official pointed out, "This year marks the 20th anniversary since the Lending Business Act was enacted to formalize the underground economy and activate lending company registration," adding, "Politicians lowered interest rates from 66% to 20% during election seasons to gain popularity, and in the process, lending companies collapsed, causing the underground economy to flourish again centered on illegal private loans after 20 years."