Four private lenders vow to fight suspension

Nonbanking private lenders are preparing to take legal action against a district office in Seoul after it decided yesterday to suspend their operations for six months.

The Gangnam ward in southern Seoul ordered four major moneylenders to halt their operations from March 5 to Sept. 4 after they were found to have charged illegally high interest rates that led them to reap huge profits.

The headquarters of the four lenders - Rush N Cash, Sanwa, Miz Sarang and Won Cashing - are all located in southern Seoul.

Last year, the Financial Services Commission (FSC) lowered the annual maximum interest rate for private lenders to 39 percent, down from 44 percent, as part of broader efforts to ease the growing debt burden felt by Korean workers.

As the economy grinds along, more middle-class households have been turning to private lenders outside the banking industry, despite their high interest rates, as they provide instant credit and are less concerned with risk than regular banks.

As their popularity grew, the suspended lenders reaped a combined 3 billion won ($2.65 million) in illegal profits by keeping their interest rates above the level banned by law after the government lowered the ceiling last year, the FSC said.

The four lenders applied a 44 percent interest rate when renewing loans worth a total of 143.6 billion won, it added. This saw them reap profits of 3.06 billion won from 61,827 individual loans.

As of last June, they had awarded loans to 1.16 million individuals worth a total of 3.57 trillion won, giving them a combined market share of 41.3 percent in Korea’s private money-lending industry.

Now they are each preparing to file administrative suits, including injunctions against the decision by the district office. After the suits are filed, their suspensions will be delayed until the court makes a final decision.

“We apologize for unsettling both our customers and the country’s financial regulator,” said an official from Rush N Cash. “But we have decided to go ahead with the administrative legal action out of concern that the [local ward’s] decision may affect the criminal investigation we are undergoing.”

Separately, the same district office brought criminal charges against the four lenders last year. It has warned them that they may face sentences of up to three years, or maximum fines of 30 million won.

The financial regulator has been striving to overhaul the country’s private money market as there have been complaints of exorbitant interest rates that are further weighing on already crippling levels of household debt.

Last year, debts by homeowners reached 63.5 million won, according to the Bank of Korea and Statistics Korea, marking a rise of 12.9 percent from 2010.

The data showed that homeowners spent an average of 600,000 won every month repaying the loans, up 25 percent from the year before.

By Lee Eun-joo [angie@joongang.co.kr]