Lenders refute profiteering chargeA new controversy is brewing in the financial industry as private nonbanking lenders have strongly opposed claims that they were profiteering from high interest rates.
Particularly, as such private lenders are expected to be suspended, the opportunities for people with low income and low credit ratings are expected to decrease. That, coupled with high inflation, could make life more difficult for such people.
The financial lenders protested a day after the financial regulators announced that four lending companies, including the industry’s top two companies - A&P Financial, whose brand Rush & Cash is more commonly known, and Sanwa Money - reported huge profits by applying high interest loans that exceeded the government’s legal limits. Among the four, three were subsidiaries of A&P Financial.
The Financial Supervisory Service on Sunday claimed that such private lenders made an additional profit of more than 3 billion won ($2.6 million) by applying 44 to 49 percent interest rates on loans totaling 143.6 billion won that matured this year.
The FSS said the companies failed to notify the borrowers of their maturing loans and when automatically renewed the companies should have applied the newly lowered maximum interest rate of 39 percent from the previous 44 percent that was changed in June of this year.
“We have told the companies to immediately refund the additional interest that was charged and are planning to inform related local governments of the violations once administrative processes are complete,” said Cho Sung-rae at the FSS.
By law, the local government could suspend lenders that charged more than the government’s limit on interest rates for a maximum of six months. When the private lender is caught applying such high interest rates for the second time their businesses could be shut down.
Currently, both Rush & Cash and Sanwa Money have a combined market share of 40 percent and have over 3.2 trillion won in outstanding loans.
As of last year, the amount borrowed from private lenders amounted to 7.57 trillion won while the number of people who borrowed money from such private lenders exceeded 2.2 million. According to the companies, the claim that they have profited from high interest is inaccurate. Yesterday, the private lenders claimed that the loans when matured are not automatically renewed. Therefore, from the day of maturity the loans are considered late payments and therefore the same rate should apply when the initial loan contract is made.
“Just because the companies did not send notification that their loans are maturing, or demand that they repay their loan principals, does not mean that the contract is automatically renewed,” said an official at the Consumer Loan Finance Association, which represents private lenders.
The controversy comes at a time when the financial regulator, as part of the government campaign, is trying to ease the financial burden on the public, particularly on the low-income class, amid rising inflation and shrinking income resulting from the stagnant stock market, while trying to ease public anger with the financial industry.
However, there is a question of whether the government’s vigorous clamp down on the industry will eventually tighten venues for borrowers with low credit ratings.
“It’s not going to be easy for people with low income or low credit ratings to find new ways to borrow since even savings banks and credit unions in recent months have been cautious about lending after the swift restructuring that was led by the financial authorities this year,” said a bank analyst who requested anonymity.
“The financial regulators, in a preemptive move to stem rising household debt under such a loose monetary policy while trying to keep the financial industry from defaulting, has been tightening its investigations,” the analyst added. “As a result, the financial companies are becoming more and more conservative about lending, especially at a time when the cost of living is rising as inflation rates continue to move upwards.”
By Lee Ho-jeong [firstname.lastname@example.org]
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