Lending rate cap to be lowered to 20% from July

South Korea’s maximum legal interest rate that private lenders can charge customers will be lowered to 20 percent per annum from July, the nation’s top financial regulator said Tuesday.

A revised enforcement ordinance to cut the maximum lending rate suggested by the policymaking Financial Services Commission in November was approved during a Cabinet meeting earlier in the day, officials said in a statement.

The move is aimed at easing interest rate burdens on beleaguered debtors. Currently, private lenders can impose a maximum 24 percent interest rate per annum by law, but the cap has often been disregarded in the market, a FSC official said. 

Under the new measure, nearly 87 percent of 2.39 million borrowers across the nation -- being charged with 20 percent interest rate per annum or more -- can expect to see a debt reduction of nearly 483 billion won ($436 million) every year, data showed. 

The authority will promulgate the revised ordinance on April 6 and the change will take effect on July 7 after a three-month grace period.

The latest rate cut, however, has raised concerns that first and second-tier banks are likely to either tighten their credit evaluation processes for low-income households or slash the total volume of loans they extend, industry sources said.

In response, the FSC vowed to introduce follow-up measures as early as April to increase the amount of government-backed loans, including the so-called “sunshine loans” set up in 2010 to help borrowers who earn less than 30 million won a year and those with low credit scores. 

Also, the authority plans to launch low-rate policy loan programs in which debtors can transfer their current credit loans at high interest rates of more than 20 percent, while setting up a pan-government task force designed to clamp down on illegal private finance operations as well as prohibit illegal advertising, officials said. 

By Choi Jae-hee  (cjh@heraldcorp.com)