A bill has been introduced in the National Assembly to render loan agreements that exceed the statutory maximum interest rate (20% annually) completely void and bar creditors from receiving both principal and interest. The aim is to fundamentally block the economic incentives of illegal high-interest lending. Industry voices say that to reduce demand for illegal private financing, an expansion of supply in the formal financial sector must proceed in tandem.
According to the National Assembly on the 24th, Kim Young-hwan of the Democratic Party of Korea led the introduction of a bill to amend the Act on Registration of Credit Business and Protection of Finance Users. Under current law, loans exceeding 60% annually are deemed antisocial contracts, and creditors cannot claim either principal or interest. In the 20%–60% range, creditors can claim principal and interest within the maximum interest rate.
Kim's office believes the current system does not provide sufficient relief for victims. Legally, interest above 20% annually cannot be collected, but borrowers in urgent need of cash often find it hard to refuse. Because illegal loans effectively continue if not caught, the intent is to invalidate the contracts themselves to strengthen legal remedies and block the economic incentives of illegal lending. A staffer in the office said, "Only if even the principal cannot be recovered will the incentive for illegal lenders to enter high-interest contracts be reduced."
Civic groups also expect the amendment to help reduce harm from illegal private financing. A representative of the People's Solidarity for Participatory Democracy (PSPD) said, "The current system leaves room to instill in illegal lenders the notion that 'even if caught, the principal can be recovered,'" adding, "If the threshold for voiding lend contracts is lowered to the statutory maximum interest rate level, protection for the financially vulnerable will be further strengthened."
Some point out that many users of illegal private financing are low-credit borrowers who have difficulty accessing formal finance such as banks, savings banks, and capital companies, making it hard to draw them into the legal market through tougher penalties alone. They note that if the structure in which demand pushed out of the formal sector flows into the illegal market is not resolved, policy effects may be limited.
In the industry, there is a view that the role of lending businesses—considered virtually the "last formal sector"—needs to be expanded. Currently, lending companies raise funds at around 7%–8% annually from capital firms and savings banks and lend at rates in the 10% range. Some strong players are allowed to borrow from banks, but the scale is limited. With high funding costs and significant default risk, it is difficult to lower rates or expand the loan limit for low-credit borrowers.
A representative of the lending industry said, "Strengthening mechanisms to protect victims' rights is meaningful," but added, "Expansion of the supply base must proceed in parallel so that borrowers who struggle to use formal finance can raise funds in the legal market." The person added, "It is also worth considering lowering funding costs by expanding bank borrowing limits for strong lending companies."