Stop the populist loan plan
The opposition Minjoo Party of Korea pledged to offer loans of up to 20 million won ($16,000) each in the 10 percent interest rate range for people with low credit through the Korea Post. The funds would come from savings and insurance reserves at the national postal agency, and hedging through payment guarantees could ensure repayment, it said. The plan is a specific part of the so-called Growing Together economic agenda of the opposition party. Few would argue about the purpose of the loan, which is to help ease people’s burdens and give hope to the working class.
But the problem is feasibility. Interest rates are determined by supply and demand, along with the credit rating of the borrower. Someone with good credit could today borrow a mortgage-backed loan at an interest rate of around 2 percent. But it is hard for those with credit ratings in the bottom bracket to get loans from the mainstream banking and non-banking sector. Instead, they must turn to smaller consumer financing lenders that demand interest rates of over 30 percent. A bill was introduced proposing to lower the cap on the lending rate of these institutions to 27.9 percent from 34.9 percent. The bill, however, has been shelved amid political wrangling over other issues.
But this idea of loans through the national postal service is impossible in the first place because the state entity is not legally allowed to provide loans to substandard borrowers. Loans in the 10 percent range are already available from various semi-state-invested financial institutions and savings banks. But these loans also require strict scrutiny. People with poor credit inevitably have to go to expensive consumer loan providers.
Past governments have all come up with various consumer financing packages for people with low incomes, but loans to people with low credit mostly soured. Non-performing debt would eat into the banking sector, and at the end of the day, the government would have to bail out financial institutions. The national postal service would first have to be licensed to provide credit-based loans in order to make use of its reserves.
Instead of trotting out an unrealistic idea to win votes, the opposition should pass the bill to ease the interest burden on those with low income and bad credit. JoongAng Ilbo, Feb. 29, Page 30