Low-Income Earners Turn to Illegal Loan Sharks
By Lee Hyo-sik
Staff Reporter
Low-income households with poor credit ratings are facing increasing difficulty in borrowing money from banks and other financial service companies in the wake of the global credit crunch (despite the central bank having provided banks with billions of dollars), with many turning to loan sharks who charge significantly higher interest rates.
In recent months, the government has introduced a range of steps designed to encourage domestic lenders to extend credit to small businesses and not households, making it even more difficult for low wage earners and the self-employed to secure cash amid rising debt and slow income growth.
Savings banks, insurance companies and even private money lenders, formerly primary sources of funding for low-income families, have become reluctant to lend money to poor households, as they are forced to hold more cash and strengthen risk management for their survival.
Many people with poor credit records and an unstable income stream have no choice but to turn to unregistered loan sharks that charge well above the legal limit of 49 percent interest set by the government.
Shinhan Bank has tightened its lending standards for home-backed loans, subjecting 100 million won-plus mortgage applicants to approval from its headquarters while lowering the amount of unsecured loans extended to doctors and other professionals.
With rising non-performing loans and deteriorating business conditions, lenders have become more reluctant to lend to businesses as they try to hold onto more cash and improve their capital adequacy ratios under the Bank for International Settlement (BIS) amid an increasingly uncertain economic outlook.
Additionally, savings banks and other non-banking financial institutions have cut lending to wage earners and the self-employed. Outstanding loans extended by savings banks increased by only 640 billion won in October, down from a 720 billion won gain the previous month.
With rising non-performing loans, many insurers are also scaling down unsecured loans and mortgages to maintain financial standing amid the continuing liquidity shortage, while credit card companies have reduced credit lines to lower payment default rates.
Even private lenders have become reluctant to extend credit to applicants with poor credit records and low income. Fresh loans extended by 45 registered private loan companies in November stood at 50 billion won, sharply down from 89 billion won in October and 189 billion won in July.
After being rejected by commercial lenders, savings banks and even private money lenders, some of those with poor credit ratings turn to illegal loan sharks, and see their debt often snowball, becoming impossible for the debtor to shoulder.
The Financial Supervisory Service (FSS) said it received a total of 3,715 complaints from those who took loans from loan sharks from January to November, up 21 percent from the same period last year.
The government cut the maximum interest rate private moneylenders can charge to 49 percent from 66 percent in September last year. Private moneylenders who charge over 49 percent in annual interest rates will face up to three years imprisonment or a maximum fine of 30 million won. Unregistered businesses and loan sharks can be sentenced to up to five years imprisonment or a maximum of 50 million won in fines.
An FSS official said more low-income households went to private moneylenders this year as it became more difficult to borrow money from banks and other financial firms, adding the regulator will encourage financial institutions to expand micro credit programs for low-income earners and the self-employed.