[EDITORIALS]Usury law: Make it work

A new law governing the noninstitutional financing business passed the National Assembly and will take effect in October. The focus of the law is requiring private money lenders to register with financial authorities and capping the legal rate of interest on loans not exceeding 30 million won ($25,000) at 70 percent annually. The law is also designed to discourage strong-arm debt collections. Operating without registration or using coercive collection methods will be subject to a maximum jail term of five years, and a violation of the interest rate cap will be punishable by up to three years in prison.

The law's intent is to reduce the damage from usury suffered by working people and to encourage money lenders to come out into the open, so it has some merit. The question, however, is in its practical application. Doubts persist whether its enforcement will support the intent of the law. Noninstitutional lenders said that under the reality of 150 percent to 200 percent interest required to raise their capital, the 70-percent cap is unrealistic, especially considering the proportion of loans that go uncollected. Financial authorities are resigned to the likelihood that up to 90 percent of loan businesses will continue to operate in violation of the law, at least in the early days of its implementation. Under these circumstances, the almost assured initial effect will be that borrowers who cannot borrow from established financial institutions will continue to depend on unsavory lenders at incredible interest rates.

But trial and error is unavoidable. Japan faced the same situation when it wrote a similar law; only 10 percent of lenders registered at first.

There are clearly businesses that are able to generate profits by charging less than 70 percent interest. It is important to show determination to enforce the new rules by cracking down on illegal operations and by expanding the sources where borrowers can get quick credit. Banks should be allowed to enter the consumer finance business through affiliated companies. And in the longer term, the new industry for smaller and riskier personal financing should be promoted through a greater availability of information on the creditworthiness of borrowers and on prevailing interest rates.