Seoul Gives Details of Small Loan Legislation

The Ministry of Finance announced Tuesday the details of proposed legislation it will send to the National Assembly to put rate caps on smaller loans. It also said it would propose more regulations on private money lenders, whom it said must be further controlled to assure legal operations.

The ministry wants a 60 percent rate cap as an absolute maximum on all loans of up to 30 million won ($23,000). It said it would not seek to regulate interest rates on larger loans; the purpose of the legislation is to protect lower-income households and businesses with poor credit ratings who often turn to private money lenders after being rejected by mainstream lenders.

The Korea Institute of Finance had suggested a lower maximum rate of 40 percent late last month, but the ministry said it did not think that lower limit could be enforced.

Private money lenders, whether individuals or businesses, will also be required to register with local governments in the areas where they operate, and the requirement will be enforced as a criminal statute, the ministry said. As an inducement to register, the ministry said, those who do so will not be questioned by tax authorities about the source of funds used in the lending operations.

Under the proposed legislation, money lenders will not be able to deal in loan collection rights with other lenders, and they will also be required to disclose fully the terms and conditions of loans they extend. Loan contracts will not be valid unless they are in writing.

Private money lending has become an explosive social issue recently. The number of Koreans with bad credit records was over 3 million at the end of March, according to Bank of Korea data.

Most borrowers who turn to private money sources take out short-term loans, and pay interest rates ranging from 24 percent to 1,400 percent, the Financial Supervisory Service said.

by Kim Young-sae