[Reviving the Loan Industry]②Will the 'Linked Type' of Legal Maximum Interest Rate Fluctuations Gain Support?

As Vulnerable Borrowers Resort to Illegal Private Loans,
Gradual Shift in National Assembly Sentiment
"Prioritize Interest Rate Reduction, Consider Linkage System"

A flyer related to private loans is placed at a closed store in Myeongdong, Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

"While swiftly alleviating the burden of financing interest rates for the loan business is necessary, if such measures prove ineffective in the market, ultimately, it will be necessary to implement a system that links the statutory maximum interest rate to market conditions."
(Facebook post by Assemblyman Kim Hee-gon of the National Assembly's Political Affairs Committee on the 11th)

The statutory maximum interest rate for 'legal loan businesses' is 20%. Last year, as the interest rate hike period began and the cost of funds increased (cost rise), loan companies completely shut their doors. Low-income and low-credit borrowers who cannot borrow from the formal financial sector are being pushed into 'illegal private loans.' As the situation worsened, a shift in sentiment has gradually been detected within the National Assembly.

Until early this year, the statutory maximum interest rate was a sacred area that no one dared to touch. In January of this year, the Financial Services Commission took the lead in emphasizing the need to raise the statutory maximum interest rate and tried to persuade lawmakers from both ruling and opposition parties, but the response was cold. At that time, among lawmakers, there was a prevailing atmosphere that "starting discussions on raising the statutory maximum interest rate for the sake of ordinary people would only lead to being labeled as 'a lawmaker who wants to raise interest rates.'"

As a result of the National Assembly's political inaction, the number of people turning to illegal private loans increased over time, and different voices began to emerge. Some lawmakers cautiously suggested, "Although raising the statutory maximum interest rate is difficult with next year's election season approaching, it is worth considering a linked system that raises and lowers the statutory maximum interest rate according to market interest rates."

The necessity of introducing a linked interest rate system was first mentioned by the Korea Development Institute (KDI), a government-affiliated research institute. Following last year's rapid interest rate hikes, there were calls to introduce a linked statutory maximum interest rate system similar to those in Germany or France. KDI Research Fellow Kim Mi-ru stated, "If a linked statutory maximum interest rate system is introduced, where the statutory maximum interest rate adjusts in line with the rise in financing interest rates, it can significantly alleviate the exclusion of vulnerable borrowers caused by rising financing costs."

According to a domestic credit rating agency, as of June last year, only 8.9% of households using '4% low-interest credit loans' were vulnerable households. However, among households using high-interest credit loans close to the statutory maximum interest rate (18-20%), 84.8% were vulnerable households. Research Fellow Kim advised, "In Korea, it is necessary to consider using the interest rates of Monetary Stabilization Bonds (1-year) or Treasury Bonds (2-year), which have maturities similar to general credit loans, as benchmark interest rates for the linked statutory maximum interest rate."

The financial authorities plan to employ a two-track strategy to revive legal loan businesses. A senior official from the Financial Services Commission said, "If we help excellent loan companies secure funding from major banks, they can lower their financing costs and reduce their costs, so we plan to pursue this first," adding, "If that is still insufficient, we will consider other measures, including the linked statutory maximum interest rate system."