By Kang Seung-woo
The country’s financial regulator announced measures, Sunday, to support low- and middle-class families who are in debt.
According to the plans by the Financial Services Commission (FSC), which are contingent on approval by lawmakers, private money lenders will only be able to charge a maximum 39 percent interest rate on loans, down from the current 44 percent. The 5-percent cut will be the government’s third reduction of the cap since 2007 and the first since July last year when it was lowered from 49 percent.
The government will also spend more than 3 trillion won (about $2.76 billion) by the end of the year to support micro-credit products and other services provided by financial institutions to the poor, the FSC said.
The proposal comes at a time when the alarm has been sounding more loudly over the country’s historically high level of household debt. Households currently owe more than 900 trillion won to banks and the number has likely already exceeded the 1,000 trillion won mark when adding unsecured loans. High levels of household indebtedness are feared to increase bad loans at financial companies and eventually weigh down on the nation’s growth.
Regulating private money lenders and other non-bank lenders has become a critical issue here, as their continued threats often trigger suicides among their economically precarious customers who struggle to repay their loans.
The maximum interest rate was 66 percent as recently as in 2007, when regulators lowered it to 49 percent.
“As the country pushes to battle household debt issues, low income families with weak creditworthiness are feared to undergo a squeeze in loans,” the FSC said.
The FSC said it will put necessary measures in place, including a law revision, to enforce the aid program at the earliest date possible.
As part of lowering the interest rate, the FSC will also monitor illegal loan brokerage, which it sees as the main culprit for high interest rates, and put a ceiling on brokerage fees.
Lenders that charge interest rates of more than 30 percent on loans pay a commission ranging from 7 to 10 percent of the loan.
The regulator said that it will provide nearly 3.2 trillion won in loans to low-income earners this year through its three lending programs including the Sunshine Loan and Smile Microcredit aimed at supplying cheaper loans to help less privileged families.
The FSC will improve the credit-rating system, as so far, credit inquiry has played a notorious role in downgrading personal credit ratings.
A credit check will not be included in the assessment of personal financial credit.
In addition, overdue loans of less than 100,000 won will affect a person’s credit rating for three years instead of five years.