Regulators are poised to impose a ban later this year on joint guarantees on loans extended by secondary financial firms, following the earlier abolishment of the lending practice among commercial banks.

Over the past several decades, lenders have demanded that some individuals or smaller businesses submit third-party debt guarantees when applying for loans.

Such guarantees have frequently triggered a chain reaction of bankruptcy for guarantors, such as families, relatives and friends, when borrowers were unable to pay back their debt.

The secondary financial sector targeted by the regulation includes savings banks, mutual financing firms, credit card issuers, capital service firms, insurance firms and the Korean Federation of Community Credit Cooperatives.

Most private moneylenders, however, will likely be ruled out from the target of the Financial Services Commission and the Financial Supervisory Service.

“We are considering issuing the ban on the collective surety on secondary financial firms’ loans as early as July,” an FSS official said. “But it is not easy to order private moneylenders to follow the policy as they are lending to borrowers with low credit standings who run a high risk of loan delinquency.”

Meanwhile, there is a possibility that the coming ban will bring social woes ― greater difficulty in applying for loans of the low- and middle-income brackets as well as small enterprises.

“When they are disqualified from loan applications in the secondary banking sector, more and more consumers will resort to loan sharks (that charge many borrowers loans rates of over 35 percent per year),” a savings bank spokesman said.

He said borrowers with low credit scores should eventually take on the burden of higher interest rates and face the growing possibility of being registered as credit defaulters.

The FSC had also indirectly admitted some problems in issuing the ban on debt guarantee in its survey.

An earlier poll conducted by the regulator showed that a majority of financial firms were not prepared for a revamp in their lending practice.

About 60 percent of the respondents said they faced difficulty in assessing the business prospects of small and medium enterprises and venture companies.

About 40 percent complained about the lack of information in assessing the creditworthiness of entrepreneurs, while 21 percent said they could not appraise the information related to the technological capabilities of start-ups or SMEs.

The FSC and its executive arm FSS are reportedly considering unveiling a revised plan, which is aimed at minimizing side effects, in the coming weeks.

An FSS official noted that “the Park Geun-hye administration holds the position that the outdated joint-debt guarantee system should be scrapped as soon as possible.”

A regulatory data showed that 1.96 million borrowers are currently subject to joint guarantees for loans issued by secondary institutions.

By Kim Yon-se (kys@heraldcorp.com)