Banks cry foul over new regulation on legal interest rate cut

A loan office of a major bank in Seoul is seen in this file photo. Yonhap

By Lee Min-hyung

Korean commercial banks are crying foul over the government's recent decision to cut the legal interest rate limit, as they are forced to take on more of a “financial burden” to support those with low credit ratings, industry officials said Wednesday.

The backlash came in response to the Financial Services Commission's (FSC) decision Tuesday to cut the upper limit of the maximum interest rate that private moneylenders and any other financial firms can charge per year by 4 percentage points to 20 percent.

This is aimed at protecting customers from falling victim to risky loan products with high interest rates.

But the government also decided to make not just banks, but insurers and credit finance firms raise 1 trillion won in capital ($883 million) over the next five years to create a fund to launch financial products that customers with low credit ratings can take advantage of.

The measure was aimed at minimizing the possible side effects from the former decision, as there stands a chance that low-credit customers will be cornered into resorting to illegal routes to borrow money at a time when private moneylenders are halting their services due to the interest rate regulation.

“Banks and financial firms are under mounting pressure from the government's demands to donate and invest more for their policy drives,” a source from a major bank said. “The latest decision by the authorities also comes as a burden for financial players here, as no financial firms want to provide loans to those with low credit ratings.”

Another source from the industry also took issue with the political purpose of the latest decision, as it came ahead of the upcoming by-elections scheduled for April.

“The public will generally welcome the maximum interest rate cut, which is good for the ruling party ahead of the election,” the source said. “Financial firms understand the need for sacrifice at times of crisis ― such as the pandemic shock ― but this is not the case.”

He urged the authorities to come up with policies that are in line with market logic.

“Any donations or investment from companies should be independently made after they make their own decisions,” the official said.

He went on to argue that financial companies here have accepted almost all of the demands and requests from the authorities, even if most of them go against their interest, amid fears of possible retaliation by regulators. But this blocks growth of the financial industry here at a time when they should proactively find next growth engines to survive in the post-coronavirus uncertainty, according to the official.