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Lee's inclusive growth drive pressures banks, raises questions about fairness
Automated teller machines in Seoul / Yonhap
By Lee Kyung-min
President Lee Jae Myung’s push for inclusive growth is pressuring banks, with questions lingering about fairness as well as the erosion of free market principles, market watchers said Monday.
Central to the criticism is his repeated calls to cut interest rates for low-credit borrowers, a group of people required to pay higher rates in the current system, which he characterized as a “financial caste system.”
This take has fueled debate about whether commercial lenders should continue to bear the burden and whether borrowers with relatively strong credit scores are being unfairly discriminated against despite their record of timely debt repayments.
The debate followed Lee’s comment that banks should use part of their profits to support vulnerable borrowers — a step he said was crucial for expanding the role of finance, which has long been limited to government-backed programs such as "sunshine loans." These public-guarantee-mediated loans reduce interest rates by shifting default risk to the government, thereby allowing greater loan opportunities for vulnerable borrowers.
Financial authorities have already lowered interest rates on these loans to 12.9 percent, down from 15.9 percent annually, following Lee’s remarks that the “cruel rates” are straining socially disadvantaged groups in the form of excessive interest charges on vulnerable borrowers.
Heads of financial groups are expected to attend a meeting presided over by financial authorities to review the progress on their inclusive finance drive, including the combined 508 trillion won ($347 billion) in low-interest loans and other financial support planned over the next five years.
The move to push banks into programs that will benefit vulnerable borrowers, but potentially blur the lines between welfare and market function, is significant, according to former Seoul National University economist Lee In-ho.
“Vulnerable, low-credit borrowers should be the responsibility of [the] government's fiscal policy in the form of social welfare and entitlement programs, not commercial lenders whose financial soundness relies on risk management,” he said.
Also undermined are the free-market principles, since interest rates are set with risks priced in, he added.
“Lenders could see their financial health significantly eroded if the government forces lower rates for high-risk borrowers. This could also raise fairness issues, because those who pay their monthly interests and repay the principal may feel frustrated if their low-credit delinquent borrowers with low credit are given leniency using taxpayer money," the professor said.
Banks’ use of their profits for government-led initiatives exacerbates concerns about a breach of trust, since banks’ fiduciary duty is to their shareholders, not the public, an industry official said on condition of anonymity.
“I think I speak for the whole industry when I say banks’ fiduciary duty is to shareholders, which is why we try to bolster shareholder return considerations as a critical part of growth strategies. The goal of the government drive is understandable, but few would agree that the method is appropriate," the official said.