It shows the party’s will…Possible re-discussion in the Li administration ↑ Public awareness of concerns over illegal private finance…There may be a level adjustment, “Low credit, expansion of alternative markets…””The illegal inflow rate is low.”
As the 21st new president Lee Jae-myung’s term begins, attention from inside and outside the financial industry, including ordinary people, is focused on whether the “10% cut in the legal maximum interest rate” he has been emphasizing will become a reality.
According to Lee’s policy pledge book on the 5th, Lee did not mention the lowering of the legal maximum interest rate in the presidential election pledge. The move is interpreted as being conscious of public opinion that a cut in the legal maximum interest rate could lead to pressure on ordinary people to use illegal private finance.
However, as the Democratic Party of Korea has continued to propose to reduce the burden on ordinary people by lowering the legal loan interest rate cap, it is expected that related discussions will be put under fire again in the future.
When the current maximum interest rate was 24% per annum in 2020, former lawmaker Kim Nam-guk proposed an amendment to the Interest Restriction Act and the Loan Business Act to limit it to 10% per annum. In addition, Rep. Moon Jin-seok and Rep. Seo Young-kyo proposed amendments to lower the highest interest rate one after another.
President Lee appealed to party leaders and lawmakers in a letter during his time as governor of Gyeongsang Province, saying, “Considering that it was 25% per year under the interest limit law even during the Park Chung-hee administration in the 1970s, the maximum interest rate for registered lenders is very high now that we are entering the era of low interest rates and low growth.”
During the 2022 presidential election, he also reiterated that he would cut the legal maximum interest rate to around 10%.
Excluded from the 21st presidential election pledge…Did you change your position
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Some speculate that President Lee may have changed his perspective and position on related policies, unlike in the past, as he left out the mention of a cut in the legal maximum interest rate in his presidential election pledge.
Until now, discussions on lowering the legal maximum interest rate have faced criticism that people who have been pushed out of the system could be forced into illegal private finance. If the maximum interest rate is cut, financial institutions will reduce high-risk loans, making it difficult for low-credit people to take out loans.
When the legal maximum interest rate was cut from 24% to 20% per annum in 2021, up to 38,000 people were also pushed out of the loan market and driven to illegal private financing, according to a study.
According to a report by the Korea Financial Research Institute, 18,000 to 38,000 people were excluded from the loan market in the year after the maximum interest rate cut in July 2021 and flowed into the illegal private financial market, according to the analysis using data provided by NICE evaluation information.
However, according to a follow-up study by the Korea Financial Research Institute again last year to see if the legal maximum interest rate cut caused a decrease in loan users, only about 2.9 to 3.6 percent flowed into illegal private finance. Considering the overall decline in the number of low-credit people and the expansion of alternative markets such as medium-interest loans and policy-based private finance, it is diagnosed that only some of those who do not use loans may have flowed into illegal private finance.
Contrary to the public perception that borrowers who cannot use loans will flow into illegal private finance, it is suggested that the first and second financial sectors were used through policy-based financial products such as credit card loans and Sunshine Loan instead of loans.
Chung Se-eun, an economics professor at Chungnam National University, said, “Considering that the recent interest rate stance and high-interest loans are mainly used by vulnerable groups, discussions on lowering the legal maximum interest rate can take place in the new government,” adding, “However, more discussions will be needed on the appropriateness of the cut as much as mentioned in the past.”
