South Korea: Limiting Rates and Tackling Exclusion

Dood Comment on South Korean Initiatives:

Recent reports (see below, and previous post) from South Korea demonstrate how measures are being taken to tackle both extortionate lending and financial exclusion. There are lessons to be learnt from this approach in the UK and the proposal to require financial instiutions to make services available to low income consumers echoes calls in the UK for a universal banking obligation and a US style Community Reinvestment Act.

From The Korea Times: 28th February 2007

1 in 5 Adults Denied Bank Loans

By Lee Hyo-sik

One out of every five Korean adults are denied loans and other financial services from banks and other institutional financial firms because of poor credit ratings and unstable job status, an opposition party lawmaker said Wednesday.

Rep. Shim Sang-jeong of the minor opposition Democratic Labor Party (DLP) said many of them have no choice but to borrow from private moneylenders who charge excessively high interest rates.

Citing data submitted by the Financial Supervisory Service (FSS), Shim said about 5.64 million adults aged 18-90 were unable to carry out normal financial activities with institutional financial services companies at the end of last year, accounting for 16.3 percent of the country’s 34.7 million adults, up 10.2 percent from 2005.

``These days, a large number of people, even those in their 20s and early 30s, have no choice but to go to private lenders for funds as banks and other establishments refuse to grant loans or issue credit cards to them because of their poor credit history and insecure job standing,’’ Shim said.

She said in reality, more people are disallowed various financial services than the statistics show, insisting that at least 7.2 million adults, or 20.8 percent of the total, are denied loans and credit cards.

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.

The number of registered loan firms stood at 16,780 as of the end of September, while the number of unregistered moneylenders is estimated to be above 25,000, according to the FSS.

To help people with poor credit records and low incomes enjoy everyday financial services, Shim suggested the government should require institutional financial firms to grant loans to low-income households, and set up a state-funded micro-credit institution to provide small amounts of finance to people with little means.(emphasis added by Dood)

With many people defaulting on their loan interest payments because of excessively high interest rates and becoming credit delinquents, the National Assembly is set to revive a ceiling on the interest rates private lenders can charge borrowers.

Last week, politicians agreed to lower the legal limit on annual interest rates to 40 percent of the principle from the current 66 percent. It is expected to pass the bill at a session planned next month.

The governing Uri Party proposed setting the interest rate limit at 40 percent per year last September, while the DLP insisted on adopting a 25 percent interest rate ceiling.

The agreement came after the Ministry of Finance and Economy, which had initially opposed the reintroduction of the interest rate cap, dropped its earlier position to support the measure.

Deputy Prime Minister and Minister of Finance and Economy Kwon O-kyu said last week that the government will ensure the measure has its intended effect. Kwon had initially opposed such a restriction last July when he was appointed as the country’s top economic policymaker.

``We will strengthen the monitoring of private moneylenders to protect borrowers from high interest rates,’’ Kwon said in an address to Uri Party lawmakers.

He also said the government, with the cooperation of associations of private moneylenders, will crack down on moneylenders who are operating illegally.