[Inside Chodong]Why Commercial Banks Need to Support Lending Businesses

When incidents occur, each media outlet tends to have a different editorial stance in their coverage. However, there is one issue in the financial sector where all media outlets seem to unite. It concerns the legal maximum interest rate, (legal) lending businesses, and the correlation with low-credit and low-income borrowers. Just typing 'legal maximum interest rate' into a portal site search bar yields a chain of articles. The logical flow is consistent.

"The maximum interest rate, which was 49% per annum in 2010, plummeted to 20% in 2021 → borrowers managed during low interest rates, but problems arose when the base rate rose → this is because the funding cost for loans increased → the cost rose, but due to the maximum interest rate cap, lenders could not charge more than 20%, so they stopped lending → vulnerable borrowers who could not get loans from lending businesses were pushed to illegal private loans."

The entities that can solve this problem are the financial authorities and the National Assembly, but practically, it is only the National Assembly. The Financial Services Commission can revise enforcement ordinances to raise the maximum interest rate up to 27.9%, but this is only nominal authority. Members of the National Assembly’s Political Affairs Committee agree that "raising the maximum interest rate requires approval not from Yeouido but from 'Yongsan’s re-approval'." The sharp drop in the maximum interest rate was also a political decision from the previous administration. The same applies to any increase.

Ignoring the increase of the legal maximum interest rate within the framework of "interest rate hikes = bad, interest rate cuts = good" is intentional. There is a widespread atmosphere that if one takes the lead claiming to protect vulnerable borrowers, they will be labeled as "politicians who want to raise interest rates." The victims are entirely those who have nothing. According to a domestic credit rating agency, 85% of households using high-interest credit loans close to the maximum rate (18?20%) are vulnerable households. Those in even more dire straits have to turn to illegal private lenders demanding interest rates of 400% per annum. The criticism that "they think poor people don’t vote, so no matter how much the media attacks, the political circles don’t budge" (a senior official from the financial authorities) is a hard-to-believe reality.

Out of frustration, the Financial Services Commission is trying to lower funding costs as a detour to revive lending businesses. Even within the same secondary financial sector, savings banks can raise funds through deposits, but lending businesses cannot. They have no choice but to borrow at 9?10% interest from savings banks and capital companies. The Financial Services Commission’s plan is to open a path for excellent lending businesses to raise funds from commercial banks at lower interest rates. Lowering costs makes it much easier for lending businesses to operate without raising the maximum interest rate.

The most necessary factor is cooperation from banks. Incentives must be provided so that banks lending funds to lending businesses gain definite benefits. Otherwise, banks have no reason to take on the risk and lend money. This can be seen from the 2018 National Assembly audit. At that time, KDB Capital, a subsidiary of the Korea Development Bank, and IBK Capital, a subsidiary of the Industrial Bank of Korea, were targeted. They were criticized by lawmakers for acting as "moneylenders" by supplying 700 billion KRW over five years to lending businesses. Eventually, they completely withdrew from lending businesses. Seeing this, banks are still reluctant to lend to lending businesses, saying "let’s not buy trouble."

If raising the maximum interest rate is truly difficult, the National Assembly should at least not obstruct banks from accepting this. Even if unseen, there is a basement floor below the first floor, and people live there. Ignoring those on the brink of being buried, as is happening now, disqualifies one from discussing policies for ordinary citizens.