Stricter rules halve payday loan lenders

By Kim Tae-jong

The number of registered payday loan companies has halved in the past five years as stricter regulations have been introduced as part of efforts to tackle snowballing household debt, industry sources said Thursday.

According to the Consumer Loan Finance Association (CLFA), there were 9,170 registered payday lenders as of Jan. 25, 49.6 percent less than in 2007.

“Due to various unfavorable business conditions, a lot of payday loan providers have gone bankrupt,” CLFA official Lee Jae-sun said. “It’s almost impossible to run loan business and make profits under the current regulations.”

The government ordered the firms to lower interest rates in efforts to ease the financial burden on low-income earners with poor credit ratings who take out loans from the companies as they have no one else to turn to. The highest legally-allowed interest rate is now 39 percent, but was 66 percent in 2007.

As a result, most payday lenders have seen their profits as well as assets drop.

Rush N Cash, the nation’s leading payday loan provider, saw a 27 percent drop in its assets last year and its total assets were 1.66 trillion won in 2012, down from 2.27 trillion won the previous year.

Its operating profit dropped about 16 percent to 670 billion won from 795 billion won in the cited period, with earnings from interest down 16 percent to 648 billion won from 774 billion won.

To cope with the fall in earnings, the company is seeking to develop a loan product with an annual interest rate of around 20 percent, a level comparable to those from secondary lenders.

However, market insiders say many small payday lenders are turning to the illegal private market and becoming loan sharks in order to survive.

“The number of registered payday loan firms has sharply decreased, while complaints for damages from illegal private lenders have soared drastically. This means many registered payday loan firms have started underground businesses,” Lee said.

The government should provide the companies with incentives comparable to those for other financial institutes if it keeps strengthening regulations, he added.

Experts say that people with low-incomes who have reduced access to payday lenders are relying more on illegal loan providers despite higher borrowing costs, arguing stricter regulations harm the loan businesses and people in desperate need of financial help.

“Many payday lenders have entered the black market to avoid the tougher regulations,” said Park Deog-bae, a senior researcher at the Hyundai Research Institute. “Overly-strict regulations have forced more people to take out loans from illegal private loan providers.”

The government should come up with measures to help payday lenders run their businesses in a stable manner, given their positive role for low-income earners compared to loan sharks, he said.