The government has launched a war against illegal private lending. A revision of the Lending Business Act, which seeks to nullify anti-social lending contracts, raise registration standards for lending businesses, and strengthen penalties for illegal lenders, passed the National Assembly in December last year and is set to take effect in June.
Experts noted that although a meaningful first step has been taken to eradicate illegal private lending, the real starting point is now. They emphasized that it is important to instill the perception that "illegal lenders cannot make money" and argued for strengthening the guidelines for fines. They also mentioned the need to consider measures to restore the financial supply function of the lending sector that has been made more difficult.
◇ "After release, if illegal loans are requested again... penalties must be strong"
Chun Jun-ho, a member of the Democratic Party of Korea (re-elected, Gangbuk-gu, Seoul), who proposed the revision of the Lending Business Act, stated, "We have deemed lending contracts that exceed the legal maximum interest rate (20% per annum) invalid and raised the maximum fine to 500 million won, which is tenfold the previous amount, but this alone is insufficient. We must eliminate the expectation that money can be made through illegal loans. The sentencing guidelines must be adjusted upward to strictly deal with illegal lenders."
Chun Jun-ho noted, "Previously, due to excessively low lending business capital requirements, the lending market was not managed or supervised and was left unattended. Illegal lenders frequently register as lending businesses after financing 10 million won momentarily and then exploit financial consumers seeking advice while pretending to be legitimate lenders with interest rates in the thousands of percent. By raising the capital requirement for lending business registration from 10 million won to 100 million won, we expect an environment where such harm can be prevented."
Expectations for strong monetary penalties have also increased. Due to the nature of lending crimes, imprisonment does not have a significant deterrent effect. Individuals may commit crimes again after serving their sentence and accumulate wealth. Therefore, to eradicate illegal loan crimes, it is crucial to eliminate the expectation that monetary gain can be achieved from this crime. Illegal loans will result in nullification of the entire interest and raise the maximum fine tenfold from under 50 million won to under 500 million won. In cases of violating the legal maximum interest rate, fines have been significantly increased from under 30 million won to under 200 million won.
While the standards for fines have been raised, it means nothing if actual sentences are not imposed. It is necessary to adjust sentencing guidelines to ensure that such standards can be reflected in practical trials. The sentencing guidelines for the Lending Business Act have not changed since they were established in 2017. We should consider that social consensus regarding crimes in the lending sector has also changed due to this legal revision. The Judiciary Administration Office's sentencing committee needs to take interest and adjust the guidelines promptly. We intend to create discussion and debate opportunities with members of the National Assembly's Legislation and Judiciary Committee and Supreme Court judges.
◇ "We must create measures to activate financial supply for low-credit borrowers in the lending sector"
Choi Cheol, a professor at the Department of Consumer Economics at Sookmyung Women's University, argued that policies to stimulate the supply of the lending market, which is a bulwark of institutional finance, should also be considered. Professor Choi stated, "It is a reality that vulnerable borrowers do not have an adequate market to borrow money," and added, "We need to explore multifaceted policies for incentives for legitimate lenders and to stimulate market supply." Ahn Yong-seop, head of the Citizens' Finance Research Institute, argued that "an increase in the legal maximum interest rate is necessary."
Choi Cheol said, "The lending sector is on the borders of institutional finance. It mainly serves individuals with credit ratings below grade 7 and below the bottom 20% of credit scores who find it difficult to borrow from banks or other financial sources. The lending businesses should act as a bulwark to prevent these vulnerable groups from falling into illegal private lending, but the situation is not easy. With the legal maximum interest rate set, high-interest trends continue to put lending businesses in a difficult position, making it hard for them to operate profitably. To protect consumers in this market, the government should establish supply activation policies. For instance, providing preferential interest rates on procurement funds to excellent lending businesses or ensuring stable funding sources from banks is necessary. Measures must be taken to supply funds for consumer benefits. The current policy is solely focused on regulating lending businesses."
Ahn Yong-seop stated, "Since the legal maximum interest rate was lowered from 24% to 20% in July 2021, the loan amounts from registered lending businesses have decreased by nearly half. The inability of exceptional lending businesses to operate is due to the lack of profitability. Compared to illegal lenders who receive interest rates in the thousands of percent, a maximum interest rate of 20% or 30% does not hold significant value for low-income individuals. Research shows that if the legal maximum interest rate is increased to around 27%, lending businesses can become profitable. The lending market is expected to be revitalized. We should also consider changing the name to restore the damaged image of lending businesses."
◇ "Banks should create small loans and joint funds for low-credit borrowers"
Experts argued that banks must fulfill their social role by developing their own small loan products for low-credit borrowers. Additionally, there was a need to establish a social safety net where emergency small living expenses could be borrowed at any time.
Chun Jun-ho said, "Banks should strive to redistribute the substantial interest rate margins they earn from loans and deposits back into low-income finance. Many commercial banks are reluctant to lend to low-credit individuals, citing that repayment of principal and interest may be difficult. They must actively develop and operate small loan products for these individuals. Banks that generate huge profits should not waste money on bonuses and retirement parties but rather take responsibility for low-income finance."
Ahn Yong-seop stated, "There is a case where a fund has been established in Yeongam-gun, Jeollanam-do, to lend up to 5 million won to local residents in need of emergency living funds. We need to create a social safety net that provides emergency small living expenses without interest, collateral, or guarantees."