[Reviving the Loan Industry] ① Loan Interest Fixed at 20%, but Funding Costs 'Snowball'... Authorities Persuading Banks

As the lending industry, considered the 'last bastion' for low-credit borrowers, continues to shut its doors one after another, financial authorities have stepped in to put out the urgent fire. First, they plan to drive an expansion of bank borrowing to ease the funding burden cited by the industry as the reason for halting loans.

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

Surge in Low-Credit Borrowers Cut Off from Funds... Authorities Plan Bank Meetings

According to the financial sector on the 12th, the Financial Services Commission is planning meetings with domestic banks to activate bank borrowing by top-tier lending companies. Although a meeting was held earlier this year, no results were achieved, so they intend to seek cooperation from banks once again. Since 2021, financial authorities have allowed bank borrowing only for excellent lending companies.

According to statistics from the Korea Credit Finance Association, as of the end of March this year, the outstanding bank borrowings of the lending industry stood at 145.9 billion KRW, down about 30% from a year earlier. This is because banks have been passive, fearing criticism for acting as a funding source for the lending industry. A Financial Services Commission official said, "We are making efforts to ensure that the ongoing excellent lending company system (Lending Premier League) can be effective," adding, "We plan to consult with banks." Lee Bok-hyun, Governor of the Financial Supervisory Service, also stated in June, "We are considering supplying some credit to excellent lending companies through banks."

The reason financial authorities have stepped in directly is that the lending doors for low-credit borrowers are rapidly closing. According to the Financial Supervisory Service, the new household credit loans handled by the lending industry from January to June this year amounted to 600 billion KRW. If the current trend continues, the total for this year is likely to be only about a quarter of last year's 4.1 trillion KRW. The number of new borrowers is also estimated to be halved compared to last year (321,000) with 70,000 new borrowers from January to June this year.

"Bank Borrowing Cannot Prevent Loan Suspension," Critics Say

Savings banks and the lending industry have faced a 'negative margin' situation as funding costs increased due to the sharp rise in the base interest rate earlier this year, but they have been unable to raise loan interest rates above the legal maximum rate of 20%. As the lending industry is the last line of defense in the regulated financial sector, it has been suspending loan supply one after another due to deteriorating profitability. The industry views the early withdrawal of Rush & Cash (Afro Financial Lending), the number one lending company, as related to this situation.

Rush & Cash originally planned to withdraw by the first half of next year but decided to cease operations by this month, moving up the schedule. In this context, activating bank borrowing is a measure to restore the profitability of the lending industry. It aims to reduce funding burdens by allowing companies to borrow operating funds at lower interest rates than from savings banks or capital companies.

However, there are also criticisms that bank borrowing cannot be a fundamental solution. Since bank funding rates have also risen along with high interest rates, borrowing from banks to lend out is less profitable than suspending new loans. A lending industry official pointed out, "For lending companies currently operating, having one more funding channel is meaningful, but it is a limited measure to prevent suspension of operations." Accordingly, it is reported that authorities will request banks to review whether there is room for further reductions in funding rates.