South Korea’s government and the ruling Democratic Party of Korea have decided to lower the maximum legal lending rate to 20 percent from the current 24 percent starting next year to ease financial burdens on beleaguered debtors, the nation’s top financial regulator said Monday.

Through the rate cut, nearly 87 percent or 2.08 million of 2.39 million borrowers across the country -- being charged with 20 percent interest rate per annum or more -- are expected to see their debt shrink by some 483 billion ($436 million) every year, according to the Financial Services Commission.

Cutting maximum legal interest rate to 20 percent was one of President Moon Jae-in’s key policy drives as he took office in 2017. As an initial step in 2018, the government lowered the ceiling to the current level from the previous 27.9 percent.

The latest move, however, may also add to the burden of low-income households, as first and second-tier banks are likely to tighten their credit evaluation processes or reduce the total volume of loans they make.

FSC estimated that, as a result, some 316,000 borrowers would not be able to borrow from either the first or second tier banks, with 39,000 of them likely resorting to illegal loan sharks. 

To address these side effects, the authorities vowed to increase the amount of government-backed loans by more than 270 billion each year, including so-called “sunshine loans,” set up in 2010 to help borrowers who earn less than 30 million won a year and those with low credit scores.

Also, the FSC will speed up its measures to curb illegal private finance, including slashing the legal interest rate of 24 percent charged on private loans to 6 percent, toughened penalties and a ban on illegal advertising.
 
“A legal lending rate cut risks possibility of keeping people with low credit scores from borrowing, but it is the time for a change. The government will come up with follow up measures in order for the new lending policy to maximize its benefits and address side effects,” said FSC chairman Eun Sung-soo. 

The new scheme will take place in the latter half of next year after revising the related enforcement decree.

By Choi Jae-hee (cjh@heraldcorp.com)