The issue of illegal private finance has persisted for decades. Nevertheless, it has yet to be eradicated. Illegal private finance is still rampant, and its methods are becoming more organized and increasingly vicious. To eliminate illegal private finance, a precise analysis of its causes is necessary. Understanding the cause of the problem is essential to propose solutions. Three fundamental causes behind the prevalence of illegal private finance have been analyzed.
① Shrinking 'last resort for the ordinary people' lend industry
The contraction of the lend industry is cited as a major factor driving the ordinary people into illegal private finance. The lend industry has faced adverse conditions as the legal maximum interest rate was lowered and high-interest rates persisted, resulting in a decline in its ability to supply funds. The legal maximum interest rate was reduced from 24% per year in 2021 to 20%. While the maximum interest that lending companies can charge has decreased, the increased cost of funds due to high-interest rates has led to a lack of profits, resulting in more lending companies being in a state of semi-closure.
According to the analysis by the Korea Institute of Consumer Finance using data from Nice Information, the outstanding balance of credit loans from lending companies declined by approximately 22%, from 10.34 trillion won in September 2022 to 8.06 trillion won last September. Additionally, the number of lending companies that issued new loans during this period decreased from 59 to 37.
The delinquency rate is also rising, worsening the business environment. According to the '2024 first half lending industry survey results' from the Financial Supervisory Service, the delinquency rate (more than 30 days overdue) for large lending companies with assets over 10 billion won stood at 13.1% at the end of June, up 0.5 percentage points from last year's end (12.6%). This is the highest rate recorded since the Financial Supervisory Service began tracking lending company delinquency rates in 2010. The delinquency rate has nearly doubled compared to 6.1% at the end of 2021 and 7.3% at the end of 2022. Due to deteriorating business conditions, the number of lending companies ultimately closing down is increasing. The total number of registered lending companies has decreased by 160 to 8,437 compared to the end of last year.
Choi Cheol, a professor of consumer economics at Sookmyung Women's University, noted, 'Because the economy is difficult, we cannot say that the demand for funds among low-credit, low-income financial consumers, classified as vulnerable groups, has decreased.' He explained, 'Since the lend market, considered the last resort in the institutional sector, is unable to function properly, individuals are being pushed into illegal private finance.'
② 'Did not know it was illegal'... serious lack of awareness
Concerns have been raised about the lack of understanding among vulnerable groups about what illegal private finance is. Many of the illegal private finance victims interviewed by ChosunBiz stated, 'I did not know it was illegal,' and they found themselves unknowingly drawn into illegal loan sharks. Individual A remarked, 'I did not know the legal maximum interest rate was 20%,' and added, 'I thought it was natural to keep paying interest like a fine because I did not repay the money on time.'
Another issue is that lending companies, facing difficulties in operations, are blurring the lines between legal and illegal, confusing financial consumers. Individual B stated, 'I left a loan inquiry on a lending intermediary website that appeared at the top of the portal site, and I thought it was a legitimate registered lending company that contacted me,' adding, 'I did not know it was illegal private finance until I applied for the loan.'
Professor Choi pointed out, 'In the current situation where there is no system to manage over 8,000 lending companies nationwide, there are no activation policies that allow for voluntary setting of the market's maximum interest rate but only restrictive policies are in place.' He commented, 'As small businesses cannot operate in the institutional sector, there will inevitably be places that operate blurring the lines between legal and illegal.'
③ Easy access to illegal private finance... legal emergency loans are difficult
There are also issues regarding accessibility. Ordinary people can access illegal private finance too easily, while accessing legal finance is not easy. Kim Jeong-kyu, a professor of police administration at Honam University, stated, 'With illegal private finance, you can receive a loan just by clicking on an advertisement that appears on internet portals,' adding, 'While the loans received this way may not be large, typically in the tens of thousands of won, the interest rates are enormous.'
Lee Gun-soo, a professor of criminal justice at BaeSeok University, also remarked, 'The easy access to illegal private finance diminishes the awareness of loans, resulting in victimization.' He noted, 'Most of the victims are individuals who are on the threshold of qualifying for bank loans, and if there were any relief measures, the number of victims would significantly decrease.'
To block illegal private finance, there must be viable financial alternatives available to ordinary people. However, there is a lack of funding for policy financial products aimed at individuals with extremely low credit, and the complex application process prevents many ordinary people from benefiting. The scale of 'minimum credit special guarantees' for low-credit individuals, who struggle to access policy financial products due to arrears and other reasons, has decreased significantly from 280 billion won last year to 170 billion won this year, nearly a 40% reduction.
Kim Sang-bong, a professor of economics at Hansung University, stated, 'Even if loan regulations are put in place, the role and resources of institutions such as the Korea Financial Services Agency, which provide small loans for ordinary people, must be increased.' However, he noted, 'The budget is woefully insufficient.'