Japanese lenders reap profits

The Korea Times

The Korea Times

Business

Thu, December 7, 2023 | 13:56

Companies

Japanese lenders reap profits

Posted : 2010-12-01 16:49

Updated : 2010-12-01 16:49

By Cho Jin-seo

Profits of private money lenders from Japan are reaching record highs despite a 5-percent interest rate cut earlier this year.

Japanese lenders are expanding in Korea as they provide quick funds to people who have low credit ratings and no collateral. TV advertisements and outsourcing of sales have also helped them win recognition in the Korean market.

A&P Financial, which runs the leading private lending brand Rush N Cash, had a 23.4 percent increase in the volume of outstanding loans at 1.38 trillion won in the accounting year from September 2009 to September 2010, compared to 1.12 trillion won a year earlier. Net profit is also expected to increase from 119 billion won to around 130 billion won this year, according to Yonhap News Agency.

Other companies have similarly upbeat profit forecasts. Sanwa Money, the second largest lender, also from Japan, saw a 42-percent jump in its lending from last year.

The results show that the third-tier lending industry is unlikely to cause a lot of damage even though the government had ordered the maximum interest rate of all banks and lenders to be cut from 49 percent to 44 percent from July. The limit had been lowered from 66 percent to 49 percent in 2007.

The industry, which serves people who are turned down by first-tier commercial banks and second-tier savings banks, is clearly booming.

According to data collected by the Financial Supervisory Service (FSS), there were 15,380 private loan firms registered in Korea as of June 2010, up 4 percent from last year. Some 7,000 companies submitted reports to the FSS, and their aggregated loans amounted to 6.8 trillion won as of June — up 15 percent from six months ago.

“The size of the registered lending industry keeps growing, and this means that there is a large potential demand for short-term capital from low-income citizens,” the FSS said in a release. ‘It is believed that the sluggish job market, lack of economic opportunities and tightened risk management at big commercial banks have helped this market to thrive.”

The private lenders usually charge high interest rates over 30 or 40 percent per year. Their customers are mostly people whose credit is not good enough to borrow from commercial banks and capital banks.

A growing number of mid-income citizens also prefer private lenders because they are faster — many loan applications are made by phone and approved within 24 hours — than banks and sometimes the firms offer hefty commissions to sales agents, knowing that low-income people are more dependent on recommendations from friends rather than searching for information by themselves.

Though they apparently help financially underprivileged people to get necessary short-term capital, the government’s financial regulators have worried that the growing size of high-interest loans may explode in a catastrophic fashion if the general economic situation worsens. The authorities plan to cut the maximum rate once again to 39 percent.

The profit margin of the private lenders will still be big enough to allow them to easily survive another rate cut or two, market watchers say. A glimpse at the accounting book of A&P Financial shows that large private lenders raise funds by borrowing from savings banks, at around 10 to 12 percent interest. They then charge customers 42.3 percent on average — more than enough to compensate the fact that around 7 percent of the customers fail to pay loans back on time.

While they carry the tag of “loan sharks” among the general public, it is true the lenders from Japan have a lesson to teach bigger and more established financial firms here. A&P Financial alone spent 53 billion won in marketing between 2008 and 2009, which is more than that of any savings bank here.

The firm also spent heavily on IT systems in risk and customer data analysis, in order to make the borrowing process secure and reduce the risk of loans going bad.

cjs@koreatimes.co.kr