[Viewpoint] A crackdown is not the answer

The country’s top consumer financing companies have been caught selling loans with interest rates in excess of the legal ceiling. They could be suspended for six months for violating regulations. Industry leader Rush & Cash posted a disclaimer on its Web site, claiming its loan practice was legally acceptable. It is up to the Seoul Gangnam District administrators to decide the suspension action.

The companies are hardly earning any sympathy from the public. Their endless TV commercials offering quick and easy loans have been eyesores.

Some are demanding authorities kill consumer financing companies once and for all. They demand a death sentence on loan sharks and other predatory lenders that suck out blood from the working-class citizens and instead create a benevolent financial habitat that allows ordinary citizens easier access to safe and cheap loans.

But that is easier said than done. To demand so is too idealistic. Price ceilings are hard to administer in any field. They serve as minimal protection for consumers, but they often end up doing more harm than good. The ceilings set by authorities are usually below the market price. Regulation ends up reducing the supply and inflating the demand. The black market is its fallout. If authorities cap gasoline prices, intermediate suppliers sell mixed supplies or cheat consumers to make a profit.

If the government regulates interest rates, lenders could compensate balances or increase commissions for the same effect of higher interests. Economists mostly believe price limits generate side effects.

If authorities impose a lower cap on lending rates, consumer financing companies are hardly likely to oblige. If they cannot make more money by keeping to the interest ceiling, they will resort to illegal means despite the penalty risks. Their victims are people who cannot seek loans at banks or licensed rates. The most desperate people are handed over to the mercy of usurers.

Authorities have been pushing down the interest ceiling on consumer financing companies too fast. The highest rates that were hovering at 66 percent per annum in 2002 came down to 49 percent by 2007. The rates were pushed down to 44 percent in 2010 and 39 percent in June. In just three months since the new cap was applied, 703 licensed lenders, or 6.8 percent, have closed down.

Their lenders will be roaming around black markets looking for places to put their money that offer higher returns. A stringent interest regulation is more or less a promotion of illegal loans. The ruling Grand National Party, however, is considering pushing down the rates to 30 percent.

Financial authorities have done their work in the wrong order. Their duty is to catch and punish financial companies that have broken the law and regulations. But more importantly, they should keep a watch on illegal lenders. To unlicensed lenders, business suspension of large consumer financing companies would be a windfall. A long cold winter awaits hard-up people who have no one else to borrow money from. Authorities say they will be coming up with supplementary measures, but cannot be expected of helpful actions.

Instead of forcing down lending rates and imposing regulations, consumer financing companies should be allowed access to various routes to raise funds so that they can compete fairly within the legal boundary.

According to the Financial Supervisory Service, loans by consumer financing companies reached 7.57 trillion won ($6.71 billion) by the end of last year. Their customers number 2.21 million. Including unlicensed lenders, about 10 percent of the country’s economically active population is borrowing money from a secondary financing industry. The moneylenders are - whether authorities like it or not - a large part of the financial market. Just because they cause harm to society, a crackdown does not solve the problem. At the end of the day, it is the hard-working and desperate people who suffer the most damage.

*The writer is the social news editor of the JoongAng Sunday.

By Nam Yoon-ho