Even in the rich-get-richer, poor-get-poorer economy of modern-day Korea, nowhere is such polarization more glaring than in the financial area. The Bank of Korea’s benchmark interest rate has hit an all-time low of 1.5 percent but about 2.7 million low-income borrowers, more than 5 percent of population, have to pay at least 34.9 percent ― or several hundred percent in extreme cases ― in yearly interests to various non-bank lenders and loan sharks.
So the government’s plan aimed to enhance financing for working-poor families, announced Tuesday, is welcome in that it could keep more of the nation’s most vulnerable financial class from falling deeper and deeper into debt traps.
The policy package will lower the interest rate ceiling on subprime loans by 5 percentage points to 29.9 percent; increase state-encouraged loans for the working-poor from 4.5 trillion won to 5.7 trillion won and lower the interest rate by 1.5 percentage points; and set up an agency exclusively responsible for small-scale loans to the poor and near-poor.
Together, these measures are expected to save the nation’s financially marginalized class up to 600 billion won in interest payments a year, while benefiting 600,000 eligible borrowers, up from the current 470,000.
As always, however, the key to the success of these policies lies in two factors ― how to maximize “substantive” benefits and minimize ill effects.
Most worrisome, the lowered interest ceiling levied on subprime loans could force lenders to tighten their loan qualifications, driving people with the lowest credit standing to turn to sharks, who demand “murderous” interest rates of 400 to 500 percent and collect debts more often than not in threatening ways even resulting in the suicide of delinquents sometimes.
Not just small lenders but large-scale, Japanese-headquartered subprime lenders, such as Rush and Cash and Sanwa Money, are known to resort to such illegal and unethical debt-collecting practices. Financial regulators and local governments are supposed to monitor and crack down on these irregularities but are failing to prevent them, citing the lack of manpower and expertise. There are too many awful stories concerning the victims of these predatory lenders. It is up to the central government and politicians to stop these tragedies.
Reducing interest rates and expanding loan amounts cannot be the best way to help the financially underprivileged in the long run, especially for a nation saddled with 1.1 quadrillion won in household debt. At stake is how to make them stand on their own by amassing assets. This plan is creditworthy in this regard by providing “matching funds” for borrowers who faithfully repay loans and make some savings. Again, regulators should do two things to produce results: check whether lenders follow the policy faithfully and not pose obstacles, and let more people know about the new system through extensive publicity campaigns.
Many well-intentioned policies have gone up in smoke because officials stopped at giving credit, and did not follow through with thorough checks. We hope it will be different this time.