FSC cracks down on loan guarantee practice

Starting next year, private lenders will not be allowed to ask borrowers for loan guarantees from other people.

The Financial Services Commission (FSC) Wednesday said it is abolishing the common practice because it reduces lenders’ ability to evaluate credit risks and financially wipes out many people who gave the guarantees.

While lenders will not be allowed to ask borrowers to get guarantors in the future, for existing loans, the guarantor can stay on the loan unless there’s a change in the contract, including an extension of a loan.

Additionally, companies that purchase these loans from private lenders will not be allowed to buy loans with guarantors.

Asking for guarantors is a common practice particularly from nonbanking financial companies like consumer finance companies, especially when the borrower has a low credit rating. Usually the guarantor is a family member or business partner.

When borrowers default, the guarantor is required to pay the loan, financially wiping many people out.

Although interest rates on loans from non-banking institutions have been falling since 2016, they are still much higher than loans from commercial banks.

In 2016, the average interest rates on loans from non-banking institutions was 28 percent, which dropped to 22.3 percent as of last March. During the same period, the unsecured loan interest rate was 24.4 percent, which, as of March this year, was 22.5 percent.

In comparison, the average interest rate on a mortgage from a bank has been around 3 percent in March 2018.

The FSC said while 33 major private lenders have been voluntarily cutting back on guaranteed loans since July 2016, the practice is still common. The 33 private lenders are companies with more than 50 billion won ($44.6 million) in assets.

At the end of 2015, there were 253,000 guaranteed loans borrowed from the 33 private lenders, and their value amounted to 1 trillion won.

As of last March, that number dropped to 119,000 loans valued at 831.3 billion won, an 18 percent drop in value.

Of those loans, 50 percent had maturity dates of less than a year.

“While such loan guarantees have been falling in number, the practice still remains among private lenders,” an FSC official said.

There will be an exception for corporate loans, which includes loans taken out by a chief executive, the largest stakeholder in a company, a person who owns more than 30 percent of the company’s shares or a person who owns - with a spouse - a stake exceeding 30 percent. Yet the guarantor must be a single person, not a number of people.

The FSC said while guaranteed loans borrowed by individuals have been shrinking, guaranteed corporate loans have been on the rise.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]