South Korea to reinstate interest rate ceilings

Korea Times - 15th January 2007


By Lee Hyo-sik
Staff Reporter

The government has decided to place a ceiling on interest rates private moneylenders can charge to retail borrowers, mostly people with low incomes who turn to alternative sources for funds.

It will revive state control on interest rates charged on loans, nine years after it abolished the regulation in 1998 at the request of the International Monetary Fund (IMF), according to the Ministry of Finance and Economy.

An increasing number of young and old with neither good credit records nor regular jobs have turned to private moneylenders for funds over the past year as they are denied loans from banks and other institutional financial firms.

"Interest rates charged by most private moneylenders must be brought down as many people default on their payments because of excessively high interest rates. We have decided to put a cap on interest rates and lower the current legal limit of 66 percent on private lending agencies", a ministry official said.

He also said the government will crack down on "loan sharks that charge interest rates over the legal limit to minimize damage to people with low incomes and provide financial rewards of up to one million won to those who report the illegal business practices of unregistered private lenders.

"However, we have not yet come up with an exact figure for the interest rate cap. We will make it public after studying the private money lending industry and consulting with the Ministry of Justice", he said.

The governing Uri Party has proposed setting the interest rate limit at 40 percent per year, while the progressive Democratic Labor Party insisted on adopting a 25 percent interest rate ceiling.

The government estimates that about 5.6 million people borrowed money from private lenders last year, paying about 200 percent interest per year on average, much higher than the legal limit of 66 percent set by the government.

There were about 16,000 private moneylenders registered with the government as of June, but some 40,000 illegal moneylenders are estimated to operate in the country.

According to the National Information Credit Evaluation (NICE) firm, one of the local credit rating agencies, outstanding balance of loans extended by loan sharks increased to 796 billion won in 2006 from 570 billion a year earlier.