[Editorial] Don’t push vulnerable borrowers to shark loans

The Bank of Korea last week bumped up the base rate by 25 basis points in an unprecedented seventh consecutive hike. The rapid rise in the base rate has stoked controversy over the legal maximum rate. The maximum lending rate is set at 20 percent. Since high-interest lenders became legitimate in October 2020, the maximum annual cap eventually came down to 20 percent in July 2021 from the original 66 percent. The lowering was aimed to ease the debt burden for low-income and low-credit people. The seven-phased cut to 20 percent from 66 percent came from a bipartisan agreement.

But the non-banking loan market has turned icy since the base rate shot up from 0.5 percent in August 2021 to 3.5 percent. The secondary and tertiary lenders have stopped lending due to a spike in their financing cost while the maximum rate has stayed unchanged at 20 percent.

According to a JoongAng Sunday report, mutual savings banks, capital financing institutions and some high-interest lenders have scaled back or cut new loans. People in need of quick cash are forced to seek shark loans. The Korea Research Institute for Financial Inclusion estimates that 640,000 to 730,000 turned from the legitimate lenders to illegal lenders from 2018 to 2021 after the maximum rate came down from 27.9 percent to 20 percent.

Unregistered lenders charge over 200 percent interest rate annually and harass borrowers. Authorities must turn attention to the woes of a number of borrowers from unauthorized lenders. Instead of habitually increasing financing budget, policy loans should be customized to help young borrowers and small merchants.

But the maximum interest rate should not hamper with the flow of loans of higher charges. Authorities need to consider the idea of flexibly adjusting the cap depending on the market rates. The changes should not disadvantage borrowers who benefit from the cap. A government official said that changing the maximum rate should be approached prudently as it must take into account financing cost and access for consumers.

Still, low-credit people should not be neglected. Former president Moon Jae-in raised controversy after saying that the current system in which people with high credit is charged with low rates and those with low credit with high rates is wrong. But that is the market principle. Loan rate is ultimately determined by credit. Anyone should be able to borrow from legitimate lenders even at higher cost. The government’s role is to ensure the market principle to work.