South Korea: Minister Changes Position to Cap Rates

From korea Times: 22nd February 2007

By Lee Hyo-sik

Finance-Economy Minister Kwon O-kyu has changed his position and now supports placing a ceiling on the interest rate private moneylenders can charge borrowers, mostly people with low incomes who turn to alternative sources for funds.

During a National Assembly hearing on Wednesday, Kwon, who is also deputy prime minister, said that it is necessary to revive state control on interest rates charged on such loans, overturning his earlier position. He openly opposed such a restriction last July when he was appointed as the country’s top economic policymaker.

Kwon said the government has found that there are many people who cannot cope with the excessively high interest rates charged by private moneylenders, and that these people should be protected by a state-initiated social safety net.

Also, Vice Finance-Economy Minister Chin Dong-soo said yesterday during a weekly press briefing that the government should not let ``loan sharks’’ that charge interest rates over the legal limit take advantage of people with low incomes.

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 financial firms.

A ministry official also said yesterday that it has decided to lower the legal limit on annual interest rates private lending agencies can charge on loans to 50 percent of the principle from the current 66 percent.

On the same day, the Ministry of Justice said it will consider restoring state control on interest rates on loans, nine years after it abolished the regulation in 1998 at the request of the International Monetary Fund (IMF). As part of its yearly business plan for 2007, the ministry said it will likely limit the yearly interest rates on loans to 40 percent.

Last September, the governing Uri Party 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.

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.