중앙데일리

Shackled by the Money Lenders

Apr 30,2001
Mr. Cho, 54, borrowed 6 million won ($ 4,600) from a private lender last year to open a store. When he was unable to make payments on the loan that carried an annual interest of 180 percent, the moneylender abducted his daughter and began extorting money from him.

The number of borrowers behind on payments has surged, and reports of abusive behavior by private moneylenders have fueled calls for measures to control their activities.

According to the Bank of Korea, total household debts last year amounted to 264 trillion won, a 24 percent increase in one year. Delinquent loans have tripled in four years, from 980,000 at the end of 1996 to 3 million. One out of seven economically active persons have bad credit records and find it nearly impossible to obtain loans from banks.

Often desperate, they are flocking to private moneylenders who are unregulated. On April 2, the Financial Supervisory Service opened a hotline for the reporting of complaints in dealings with private money lenders. As of Wednesday, the service had received 573 calls; 426 of the callers said they were burdened by extremely high interest rates, and 44 reported being victims of violence or extortion. Callers told stories of interest charges that ranged from 24 percent to 1,400 percent per year.

An official from the service, Korea's chief financial watchdog, said there were an estimated 3,000 private moneylenders nationwide. Among them, only about 1,400 are registered. According to agency estimates, 5 million people are currently using this market for funds, including 3 million people with bad credit histories.

Analysts pointed to the indiscriminate issuance of credit cards and the systemic disadvantages the poor face in the financial market as the main reasons these operations are able to prosper.

"The mess in the credit card industry is the major reason behind the problems in private money lending," said Kang Jong-man, the Korea Institute of Finance's director of research.

Indeed, an investigation by Green Consumers Network into 41 street booths in Seoul taking credit card applications found that 39 accepted the applications without proper identification.

The number of financial institutions catering to small merchants and low income households has decreased since the foreign currency crisis that struck Asia in 1997, and banks are still reluctant to offer loans without collateral. The number of mutual savings firm has fallen from 231 in 1997 to 126, according to the government financial agency.

Laws capping interest rates were introduced in 1962, establishing grounds for a presidential decree to set the legally allowed maximum annual interest rate, which was not to exceed 40 percent. The laws were abolished in 1998, in the midst of the financial crisis to satiate Korea's urgent need for foreign currency. The government accepted the International Monetary Fund's position that limiting interest rates by law can distort the workings of the capital market.

But financial industry experts stressed that the private financing market serves a legitimate purpose. Small merchants, students, housewives and those with bad credit have no other place to go. The problem is that these clients must pay interest rates that are much higher than those charged by established financial institutions, even after taking into consideration the risk of lending money to people and corporations with tarnished credit histories.

Mr. Kang gave an example of a private money lender playing a positive role in the economy: textile wholesalers. Textile and clothing manufacturers dump large quantities of products on the market. Payment, which can reach 100 million won, should be in cash and upfront.

The need for cash is short term, rarely over a week, Mr. Kang said. The merchants who want to buy the bulk product cannot go to banks, because the established financial institutions do not do business for short-term transactions. So the merchants turn to the private lending market charging 0.5 to 1 percent interest per day.

"The market is engaged in genuine commercial activity," Mr. Kang said. "If the government tries to shut down the underground capital market, these commercial activities and the flow of capital will be stopped. That can be a real problem." Mr. Kang said merchants such as this represent the largest demand for private money lenders.

One solution to the problem is to help people clean up their credit records. The Ministry of Finance and Economy will allow the Korea Federation of Banks to delete the credit records of borrowers who repaid loans in full as of Tuesday, and the government is reviewing a bill to regulate interest rates and to make it mandatory for private money lenders to register their operations. These measures have caused a stir among those who approve and those who are opposed.

One side said that even though the laws cannot completely resolve the current problems, they can serve as a minimum safety net for those borrowers who are usually at a disadvantage when taking out loans.

The opponents argue that setting the cap on the private market can backfire, increasing the barriers against low income household borrowers.

"The market can decide what rate of interest is appropriate," said Mr. Kang. "The problem lies in unfair contracts. The contracts are what we have to look into."





by Kim Hyo-jin




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