[Editorial] Third-tier lending

Aside from lending from the first-tier banks and secondary financial firms, the loan issuance balance from private moneylenders is rapidly increasing. This indicates that South Korea has become a “debtor republic.”

According to the Financial Services Commission, the outstanding loans issued by the third-tier lenders came to 13.2 trillion won ($11.9 billion) at the end of 2015. This marked a 7.3 percent increase from 12.3 trillion won at the end of June 2015.

Considering the lending rate charged by private moneylenders legitimately is up to 27.9 percent per annum, the increase in outstanding loans worth 900 billion won in just six months is serious in terms of households’ aggravated burden of interest payments.

The FSC data showed that salaried workers accounted for 49 percent of borrowers, followed by the self-employed at 20 percent and housewives at 12 percent. A regulatory official noted the number of corporate borrowers -- possibly micro-businesses -- has sharply increased.

This indicates that more and more citizens resort to the third-tier lenders due to their urgent need for money after failing to receive additional loans from commercial banks or savings banks. It is not a desirable situation that the borrowers have to bear the interest burden of more than 20 percent, while the nation’s benchmark rate stays at a record-low of 1.25 percent.

In case of some borrowers, they have no choice but to tap loan sharks -- though they are not low-income earners -- due to their low credit scores, which range between seventh and 10th. Apart from delinquency records, any borrowing record from the second-tier and third-tier firms harms citizens’ credit standings.

Further, some unregistered private lenders, often called usurers, are reportedly charging illegal annual rates of about 50 to 100 percent, despite a crackdown by law enforcement agencies.

The data also shows that the ratio of individuals in their 40s and 50s has jumped in the customer portfolio among private lenders over the past few years. Four years ago, the ratio of customers in their 40s and 50s stood at 23 percent and 9 percent, respectively. This year, it increased to 28 percent and 18 percent, accounting for nearly half the total.

This could mean those in charge of household living expenses are actively taking the high rate loans to purchase basic necessities amid the reduction of household disposable income. Or debt-saddled micro-business owners are seeking to secure operating funds via urgent loans.

The income disparity between the haves and have-nots has deeply widened, and more middle-income earners are in danger of falling to low-income earners in the wake of heavy debt.

It is time for the financial authority to take more fundamental countermeasures to break out of a vicious circle, under which many individual debtors take out loans to repay their maturing debt.

It is praiseworthy that the FSC sought legislation for years in which the maximum rate for the moneylenders was reined in from 66 percent to 49 percent in 2007, 39 percent in 2011, 34.9 percent in 2014 and 27.9 percent in March 2016. The financial authority, nevertheless, needs to push for a proactive policy, which could widen the loan application opportunity in the first-tier market involving KB Kookmin, Woori, KEB Hana and Shinhan banks.

If the third-tier segment customers have no delinquency records, they should be given the option of loan products from the first- and second-tier firms with low rates. The sincere borrowers’ credit standings should also be raised.

Many of the local commercial banks were able to weather the market thanks to huge taxpayer contributions during the 1997 Asian foreign exchange crisis. Now their loan barriers should be eased to save taxpayers, who are themselves bearing a tough interest burden. 

Otherwise, the nation might see another version of the 2003 credit card fiasco that yielded 3.7 million credit defaulters.