[Viewpoint]A strong economy starts at the bottom

Since the financial crisis of the late 1990s, banks have stopped catering to people in the lower income bracket, and they are feeling a growing sense of aggravation. The income gap is widening and financial polarization is underway.
The domestic banks that used to selectively finance small loans in the past have prioritized safety and profits since the financial crisis. They now aim strategically at the wealthy by offering private banking and are also focusing on housing-backed mortgage loans.
As a result of these changes, the people in the lower income bracket who lack collateral and credit not only have a hard time getting bank loans but also find themselves in a worse position regarding interest rates than in the past.
Moreover, the traditional working-class financial institutions, such as mutual savings banks and credit cooperatives, are not fulfilling their proper roles.
The management at these institutions has still not recovered from the financial crisis. They just want to survive and are focused on profitable businesses such as mortgage loans rather than financing housing and other real estate projects.
The economy for the working class people is declining as the demand for money grows drastically.
However, the local financial institutions are not responding to that need. According to a credit rating institution’s data, 7 million people are classified as below the 7th grade in the individual credit rating system, which means any public institution can reject a loan. If each of these individuals needed just 5 million won ($5,400), the total demand would be more than 35 trillion won. However, established financial institutions are not lending enough, which is a boon to business for the illegal private money lenders. Consequently, extremely high interest rates and illegal money collections have become major social issues.
The financial struggles of the working-class people are likely to continue to aggravate the income gap and hurt the economy for them even more. If the economy at that level continues to wither, social instability will grow and the rest of the economy will weaken, ultimately pushing the national economy into stagnation. In order to secure chances to create jobs and resolve the financial alienation felt by many, the small-loan finance industry needs to be revitalized as soon as possible.
However, when market principles are strictly applied to the financial sector and the government’s finances are not sufficient, we can’t expect any epoch-making financial system for the working class to be established.
Therefore, we should seek an alternative. First, non-bank loans for people with low incomes whose credit rating keeps them from getting bank loans should be reestablished.
Proper supervisory policies, together with a sophisticated control system, will enhance the fallen prestige of such financial institutions.
The government also needs to support these financial firms in order to complete their pending restructuring.
For the citizens who are earning irregular incomes and facing temporary money shortages, consumer financing ― which has only recently become a part of the established financial sector ― must be vitalized. We need to create an environment in which a user can easily get a loan at a tolerable interest rate.
We need to benchmark the success of Japan’s no-mortgage consumer financing, which now forms the backbone of its small-loan finance industry despite an aggravating management environment, such as a low interest rate.
Finally, for the citizens who are not eligible even for consumer financing due to their low credit ratings, we need to foster alternative financing with close guidance and management.
We should help them stand up on their own with funds fostered with money from dormant bank accounts, as well as donations from civil groups, agencies, companies and financial institutions.
The election season has come. Every presidential hopeful talks about reviving the working-level economy. I would like to remind the presidential candidates that financially supporting the working class is as important as creating jobs for them.

*The writer is a researcher at Hyundai Research Institute. Translation by the JoongAng Daily staff.

by Park Deok-bae