By Kang Seung-woo
A 32-year-old office worker, identified by his surname Park, recently borrowed some money from one of the nation’s major private money lenders.
Often snubbed by commercial banks due to a low credit rating, Park did not expect to secure a loan, but he was approved by the lender.
As is common in his case, private money lenders operating here depend on aggressive marketing strategies to expand their businesses and as a result, the amount of the loans they approved surpassed 1 trillion won in the first half of 2011, data showed Wednesday.
According to the latest figures from the Financial Services Commission (FSC), Financial Supervisory Service (FSS) and Ministry of Public Administration and Security, the outstanding loans from private money lenders totaled 8.63 trillion won ($7.64 billion) as of the end of June, up 1.70 trillion won from 7.56 trillion won from the end of last year.
The number of clients turning to loan sharks increased from 2.2 million in 2010 to 2.47 million in June this year.
Unsecured loans accounted for a large part of the amount, totaling 7.38 trillion won, or 85.5 percent of the total outstanding loans, while secured loans recorded 1.25 trillion won.
Unsecured lending increased 16.9 percent, or 1.69 trillion won, with per capita loans reaching 3.14 million won.
The financial regulator attributed the surge to money lenders’ aggressive marketing strategies.
“Per capita loans increased because major money lenders have aggressively expanded their operations, using massive advertisements and lacking an intensive credit evaluation of debtors,” said an FSC official.
The FSC said that the maximum annual interest rate private lenders can charge dropped 5 percent to 39 percent in the second half of this year, so large entities expanded their businesses to make up for the loss by lending even more.
“We plan to tighten regulations for private money lenders’ commercials and lower their credit line based on ability to repay debt, which is expected to contribute to slowing the number of loans,” he added.
Due to the lowering of the maximum annual interest rate, the average interest rate dropped from 41.5 to 38.6 percent in unsecured loans, while that of secured loans fell by 0.4 percentage point to 18.2 percent.
In the money-lending industry, 91 players whose assets are more than 10 billion won lent 7.42 trillion won, accounting for 97.7 percent of the total lending.
The majority of borrowers from the 91 money lenders were office workers, at 60.1 percent, and independent businesspeople, at 21.7 percent, but students and housewives who often fail to repay debts also borrowed 169.7 billion won, or 8.4 percent.
In addition, money lenders were found to still deal with people with low credit ratings, as 74.1 percent of their clients were at level six or below.
Despite their low credit ratings, however, their delinquency ratio slid from 7.2 percent at the end of last year to 6.5 percent in June.
Data showed there are 1,017 loan brokers and they made 92.2 billion won in commission from 1.49 trillion won in loans, with commission averaging 6.2 percent.
Meanwhile, the financial authorities have started taking action to punish Rush N Cash and Sanwa Money for breaching rules on interest rates.
Rush N Cash, the private money lending wing of A&P Financial, leads the industry with 1.65 trillion won loaned to 482,000 borrowers and Sanwa Money, invested in by Japan-based Sanwa Group, is ranked second with 1.60 trillion won lent to 421,000.
Along with the top two loan sharks, A&P Financial’s two affiliates, Won Cashing and Miz Sarang, were also included in the overhaul.
The FSS plans to provide the results of their investigation to the Seoul Metropolitan Government, as technically, the rights to suspend A&P Financial and Sanwa Money is under the jurisdiction of Seoul’s Gangnam district, where the headquarters of both lenders are located.
Authorities in June lowered the maximum annual interest rate private lenders can charge from 44 to 39 percent, but the four lenders accused by the FSS have charged their previous rates of between 44 and 49 percent in renewing 143.6 billion won worth of loans even after the rule change. This allowed the lenders to reap a combined 3.06 billion won in “illegal” profits, according to the FSS.
According to local law, a private lender could receive a six-month business suspension for charging interest above the legal limit and could lose its license for a second offense.
The punishment is likely to be decided early next year.
The financial watchdog’s measures are part of the government’s efforts to contain soaring household debt, which may hit the nation’s economy hard.