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| Democratic Party of Korea floor leader Kim Tae-nyeon, center, speaks during a meeting with government officials at the National Assembly on lowering the maximum interest rate, Monday. / Yonhap |
By Kim Bo-eun
Local savings banks are set to bear the brunt of the government's decision, Monday, to lower the maximum interest rate to 20 percent from 24 percent.
"We decided to lower the interest rate amid an era of low interest rates and to alleviate the burden on low-income households," the Financial Services Commission stated, following a meeting between government officials and members of the ruling Democratic Party of Korea (DPK).
"The era of low interest rates is continuing, with the Bank of Korea's key rate down to 0.5 percent. Keeping the maximum interest rate at 24 percent is not aligned with the latest developments," DPK floor leader Kim Tae-nyeon said at the meeting.
Revised regulations containing the changes will go effect in the latter half of next year. The FSC said the government has allowed for some time until regulations on the lowered interest rate go into effect, given the time needed in making revisions to regulations and economic uncertainties based on COVID-19.
The maximum interest rate was lowered to the current 24 percent in February 2018. It was at 66 percent in 2002, which was lowered to 49 percent in 2007, to 44 percent in 2010, 39 percent in 2011, 34.9 percent in 2014 and 27.9 percent in 2016.
Lowering the maximum interest rate to 20 percent was one of the tasks President Moon Jae-in sought to accomplish during his term, to ease the burden on the low-income bracket.
The FSC stated that among 2.39 million people who received loans with interest rates exceeding 20 percent, 87 percent would be able to see a collective 483 billion won reduction in interest payments annually.
But at the same time, as stricter screening for loans issued by these institutions goes into effect, the government estimated that 13 percent of the borrowers of loans with interest rates exceeding 20 percent will face difficulties in receiving new loans. Among them, 39,000 are estimated to turn to illegal private money lenders.
The FSC has pledged to expand government-backed loans for those with low credit levels and alleviate debt for delinquent borrowers.
The government has also stated that it would boost its crackdown on illegal private money lenders and strengthen penalties for related offences.
Institutions such as savings banks and capital firms which mainly offer high-interest-rate loans to customers with low credit will likely see a blow dealt to their business.
Stricter screening for loan applications, and the resulting group of individuals with low credit being unable to receive loans, will become a loss for savings banks.
"Institutions will likely do profit-and-loss calculations when approached by a customer who is eligible to receive a loan with 23 percent interest rate, as the firms will need to lower the rate next year," an industry official said.
"We will become subject to shrinking profits and smaller institutions will likely suffer more," he said.
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