“Loan Shark” or “Life Saver”? Pros and Cons of Private Money Lenders

SEOUL, Oct. 25 (Korea Bizwire) – A “loan shark” is a derogatory term referring to a person or body that offers loans at extremely high interest rates. Interest rates are so high that their lending practices are often being accused of exploiting a borrower’s financial troubles. 

Cash loans to people in dire need of money, however, play a positive role. Take, microcredit, for example. This micro-financing is the extension of very small loans to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. 

In many developing or underdeveloped countries, microcredit contributed significantly to alleviating poverty. And in many case, bright but poor entrepreneurs can be able to stand on their own feet helped by micro-lending businesses. Most importantly, this new concept of lending empowers women to be self-reliant and uplift entire communities by extension. 

Loan business, in this regard, plays positive and negative roles at the same time. How about licensed money lenders’ roles in Korea? About this, intriguing research topics were discussed in Korea with respect to the “Positive Effects of Registered Private Lenders in Terms of Economic Growth,” which was also a main topic  for 2014 consumer financing conference held in Jeju island on October 23. The government officials, academics, along with executives with the local private lenders were in attendance at the event. 

Based on the eight-year data between 2006 and 2013 on the nation’s top-ten registered private lenders, the total production inducement effect they have generated was estimated at 41.5 trillion won, or 1.55 times of the total outstanding balance of loans, said Park Deok-bae, a senior researcher with Hyundai Research Institute (HRI), the think-tank of Hyundai Group. 

According to HRI, the nation’s top-ten lenders have created 260,000 jobs during the same period. Their contribution to the national economy has been 0.08 percentage point a year, said the researcher, underscoring the nation’s need to shed “renewed” light on the roles and functions of (licensed) private lenders. 

As of the end of March this year, the number of people with poor credit ratings between 7th and 9th grade was 5.06 million. The total volume of money they need in order to maintain their living standards but unavailable in the commercial banks and savings banks due to their low credit rating is estimated at 39.4 trillion won. 

The demand for short-term loans from these people with low credit ratings is about 18.7 trillion won, of which 42 percent (7.9 trillion won) is supplied by the top-ten private lenders. The remaining balance of 10.8 trillion won is the excess demand for short-term credit loans. 

But, it is undeniable that Korea’s household debts are snowballing. In fact, the nation’s household debts have not only exceeded the OECD average but also reached the critical point which could trigger an economic crisis has come out, according to an analysis by Korea Institute of Finance in last May. 

And South Korea’s recent measures to boost the stalled economy — including a spate of interest rate cuts among them — might increase already mounting household debts. The Bank of Korea dropped its key interest rate another quarter of a percentage point this month to 2 percent, the record low, following a 0.25 percentage point rate cut in August. 

This is because money is scarce in the national economy and the government points its finger at major companies, saying they are not willing to invest their money. Indeed, Lee Ju-yeol, BOK Governor, in a meeting with the heads of major conglomerates on Friday, urged them to invest more to stimulate the national economy. 

Money is really tight among those in desperate need of cash. Stats bear this out. In the year from 2013 to September of 2014, there were a total of 757,812 slots of commercials involving loan services broadcast on the nation’s cable TVs, according to Congresswoman Ryu Ji-young (the ruling Saenuri Party). That means, you are likely to watch on average, a whopping 1,400 slots of such advertisement daily on the nation’s cable televisions. 

The barrage of money lending advertisements reflects a surging need of cash loans among the ordinary people who can’t afford loans through major banks. Most of them are the ‘working poor’.

The nation’s top-five private money lenders poured a combined advertising budget of 480 million won over the past four years, according to the lawmaker. And the ROI for their advertising is immense: they reaped a staggering 6 trillion won of profit for the same period. Money lending proves once again a lucrative business in South Korea. 

All said, the nation’s private loan service industries might enjoy a much brisker sales as money is getting tighter due to the economic doldrums.

That might raise the prospects of a much tighter related regulations aimed at the private loan sector. But, inasmuch as private money lending businesses have positive and negative effects, there should be a much balanced or creative approach toward consumer financing sectors – in particular on the small-loan financing areas, said the researcher with HRI at the conference. 

By M.H. Lee (mhlee@koreabizwire.com)  & contributed by Jerry M. Kim (jerrykim@koreabizwire.com)