To prevent a "second Myeongnyun Jinsagalbi," the government said on the 10th it will tighten oversight of policy loans to franchise headquarters. Myeongnyundang, which operates Myeongnyun Jinsagalbi, previously faced criticism for making money off interest by borrowing at low rates from policy finance institutions and then lending to franchisees at high rates.
◇ Franchise headquarters that gouged owners rejected for policy loans
According to the Korea Fair Trade Commission and the Financial Services Commission, policy finance institutions such as the Korea Development Bank (KDB) will restrict new policy loans and guarantees if improper credit, such as high-interest lending to franchise owners, is found at a franchise headquarters. Existing loans and guarantees will not be rolled over at maturity. Conversely, if a franchise headquarters lowers the interest rate on loans it extended to owners, it will be excluded from the list of entities restricted from funding supply, meaning policy loans will be considered favorably.
In addition, when handling new policy loans or guarantees, institutions will obtain a handwritten statement of fact from the CEO regarding the lending records of the franchise headquarters and related companies. This is to hold the CEO directly accountable if a franchise headquarters hid the fact it had lent money to owners and received policy loans.
Furthermore, prospective franchisees will be provided with transparent information on loans offered by franchise headquarters. Before opening a franchise, a prospective franchisee receives a disclosure document from the headquarters with expected sales and other details. Going forward, the document must also include the lending rate, repayment terms, and the lender's registration number under the lending business.
◇ Myeongnyundang lent to owners at up to 18% annually
A joint probe by the Korea Fair Trade Commission (FTC) and the Financial Services Commission (FSC) found that Myeongnyundang borrowed 83 billion won at annual rates of 3%–6% from policy finance institutions such as the Korea Development Bank (KDB), then lent to Myeongnyun Jinsagalbi franchise owners and others at 12%–18% annually. The company also used its own funds as loan capital; in this way, the total loans extended to owners came to 231.9 billion won. The principal was collected together with the price of items that owners were required to purchase from headquarters, such as meat.
An additional case was uncovered in which Company A borrowed at 4% annually from a policy finance institution and then lent to owners at 13% annually, similar to Myeongnyundang. However, the government did not disclose the company's name, noting that, unlike Myeongnyundang, Company A was registered under the lending business and its loan scale was 11.4 billion won.
Meanwhile, the government plans to end the practice of "split registrations," in which firms keep total assets under 10 billion won and outstanding lending under 5 billion won to maintain only local government registration as lending businesses. Unlike locally registered lenders, those registered with the Financial Services Commission (FSC) are larger in scale and subject to total asset limit regulations, such as restricting lending to within 10 times equity capital. The FSC plans to amend the Lending Business Act to apply such rules to locally registered lenders as well, eliminating regulatory arbitrage.