Consumer Financing Policy and Related
Consumer Issues in Korea: Comparative Analysis
with Cases in Japan
Jong In Lee
Research Fellow, The Youido Institute Adjunct Professor, Konkuk University [email protected], 82-10-3168-1306
July 1, 2011
Abstract
Working paper; this is a draft version of a paper that will be further developed prior to be duplicated. Please do not cite or quote without permission from the author. I welcome any comment about contents of the paper. I acknowledge the helpful comments from participants of the Korea Consumer Law Association Workshop recently.
Ⅰ
. Introduction
Recently in Korea, the problems concerning so-called consumer financing are becoming an important social issue.1 The main background of it is the Korean government's active policy toward ordinary people. Also, the global economic depression which was triggered by the financial crisis of the U.S. is another influence. Despite gradual recovery of the global financial market, the situation in consumer policies is still a problem. This is a common phenomenon throughout the world including the Korea, the United States, and European countries.
In Korea, a huge number of the working class with low income and low credit emerged along with the IMF financial crisis2 which began in 1997.
Also, in 2003, a serious disturbance of excessive supply of credit cards caused a sudden increase in the number of people with bad credit.3 That is, the economic power of low and/or middle class people weakened, but the demand for consumer financing services increased. However, it became more difficult for low income and low credit classes to access financial services.
In the long run, this hampered further economic growth. The problem became worse since people with low credit and/or low income became more dependent on cash advance, card loans, private loans from both registered and non-registered moneylenders4 etc., and high interest rate finance service in private banking market. Despite government control, damages related to moneylending business and private loaning are increasing.
Thus, the Korean government is struggling to prevent consumer damages related to consumer financing by revising and making laws. In October 1, 2007 and July 13, 2010 the government lowered the maximum interest through revision of the Credit Business Act5, which corresponds to Japan's ‘Moneylending Business Law(貸金業法)' and 'Investment Law(出資法)'. In March 29, 2007, the government revived the Interest Limitation Act, which had been repealed after the IMF crisis. In February 2009, 'the Fair Collection Service Act' was enacted.
These situations in Korea reflect those in Japan, in which problems related to consumer credit have arisen since the '60s. In this presentation, we will not only examine the legislative changes in recent years that I just mentioned and the Korean government’s approaches, but also compare them with various problems in Japan. This could be a reference for setting the direction for Japan’s policy for the consumer financing in the future.
Under these conditions, we will discuss the significance of consumer financing in the first section, and then investigate the current situation of consumer financing policy and related consumer issues in the next section. In the third section, we will review several typical laws and regulations on unfair and illegal acts in Korea. In section four, by focusing on the three common aspects of Korean and Japanese laws, which are regulation on interest rate, problem of over-indebtedness, and related administrative approach, we will discuss the suggestions that arouse from these approaches.
1 The word ‘ petty loans for the working classes or Consumer Financing(庶民金融)’ is not concretely defined in Korea both in academically and politically yet.
2
It is called the foreign exchange crisis in Korea. 3
In Korea, it has changed to the credit delinquent(金融債務不履行者) by the law. 4
The moneylending business or private financial service is called 'loan business‘ in Korea. Though the registered moneylenders classified as a small-loan financial institution based on the Credit Business Act of Korea, non-registered are classified as a private loan business. 5 The full sentence of it is, the Act on Registration of Credit Business, etc. and protection of Finance Users.
Ⅰ
. Significance of Consumer Financing
In Japan, the term 'syominkinyu(庶民金融)' is not common. There are expressions such as 'financial services toward the ordinary people, or 'small size financing toward consumers' but usually 'consumer finance,' or 'consumer financial service' are used as similar concepts.
In Korea, there isn't a clear definition of 'syomin(庶民),' but the common Korean definition of 'syominkinyu' includes finance for low income and/or low credit consumers from both public and private financial institutions. The 'syomin‘ is usually defined by both credit and income levels. In Korea, 'syomin' refers to people below level 6 credit and/or under income level of 5 degree.
Table.1: Rating of the Income level of Korea in 2009(ten degree basis)
income degree monthly income income degree monthly income
first 524,908 sixth 3,260,817
second 1,325,482 seventh 3,768,294
third 1,879,227 eighth 4,402,586
forth 2,346,553 ninth 5,375,331
fifth 2,810,975 tenth 8,730,080
Source: the National Statistical Office(www.kosis.kr/) Based on average monthly income. Korean won.
There are no boundaries among nations in the fact that providing harmonized financial services for the ordinary people is essential for a stable national economic growth. In Korea, this is considered a major social issue and is the main subject of government policy-making.
Ⅱ
. The current situation of consumer financing policy and related consumer
issues
The problems of consumer finance in Korea have a shorter history than those in Japan, but normally they are said to have been intensified since the IMF financial crisis. Also, after credit card crisis in 2003, the number of delinquent borrowers with low credit has much increased.6
Although the damages of the economic depression which started in the US near the end of 2007 are being gradually recovered, the situation in consumer policies is still a problem. There is a vicious cycle in small-loan finance. First, the people demand for finance(emergency money), but there is a refusal from financial institutions and banks, so they use private loan, and this increases push the burden of interest, which increases the number of delinquent borrowers. According to this information, the main problem related to the consumer finance in Korea is the
6
Please refer the Oyama(大山小夜), 「韓國の消費者信用と多重債務問題」,『國民生活硏究』第45券第 3号, 2005, pp.35-41.
difficulty of repayment due to high interest rates. This is not so different from the problem of the over-indebtedness that is considered as a serious problem in Japan.
1. The number of people of low-credit levels
The results may vary according to institutions, but as you see in Table 2, the number of people with credit level 6 or below is approximately 9.5 million, which is 25% of the total number of citizens. The number of those with level 7 to 8, or "caution" level, is 5million 865 thousand, and those with level 9 to 10, or the "danger" level, 1 million 669 thousand. The people of low credit level from level 6 to 10 are about 30% of Korea's economically active people.
Table 2: Distribution of credit rating and the interest rates level of Korea (thousand, %)
credit rating prime good average caution risky total
1 2 3 4 5 6 7 8 9 10 distribution of credit rating 3,049 (7.9) 5,146 (13.4) 4,421 (11.5) 5,228 (13.6) 11,020 (28.8) 1,921 (5.0) 3,595 (9.4) 2,270 (5.9) 1,028 (2.7) 641 (1.7) 38,319 (100.0) average interest rates 6.25 7.25 9.32 11.85 14.54 16.17 18.33 20.13 22.0 22.84
Source: The Korea Financial Supervisory and the National Information & Credit.
Numbers between parentheses are percentages. The credit rating is second quarter of 2010 and the average interest rates are last of February of 2010.
2. The size of delinquent borrowers
The sudden increase in delinquent borrowers since the IMF crisis is one of the most significant problems in Korea. In Korea the official data of delinquent borrowers was accumulated from 2002, in that 2.63million, but was increased to 3.72 million in 2003. After that, it was gradually decreasing. However, many people are still having difficulty in accessing financial institutions (bank, etc.).
Table 3: Yearly variable of delinquent borrowers in Korea (thousand)
year 2002 2003 2004 2005 2006 2007 2008 2009 2010 June
delinquent
borrowers 2,636 3,720 3,615 2,975 2,796 2,583 2,271 1,934 1,736 Source: http://www.fsc.go.kr/.
In Korea, the credit repair program, the court's personal regenerative program and the personal bankruptcy system played a big role in reducing the number of delinquent borrowers. The credit repair program, from 2002 to July 2010, has helped a total of 873 thousand people to escape from being delinquent borrowers. But people who filed for personal bankruptcy are 591 thousand, which is 33.9% of the total escapers. The problem of deterioration of credit rating is still a serious problem.
3. High level of indebtedness and private loan reliance
According to the recent survey by me, the percentage of loan compared to household income was relatively high and, higher for over-debtors. The total percentage of loan of all those who replied was about 1.8 times compared to their annual income. About half have loans smaller than their annual income, but the other half have loans that exceed double their income. And 21.5% have loans 5 times their income. Also, 97.7% of over-debtors who have made loans over 5 times (222 people), have loans exceeding double their income.
Thus, we can conclude that the percentage of loan is higher for over-debtors, and that their burden is serious.
Table 4: Loan-disposable income ratio
ratio less than 20% less than 20-40% less than 40-60% less than 60-80% less than 80-100% less than 100-300% less than 300-500% over than 500% total* number of cases 78 94 36 18 4 69 58 98 455 Percentage 17.1 20.7 7.9 4.0 0.9 15.2 12.7 21.5 100.0
Source: Jong in Lee (2010), p.157.
After the IMF crisis, private loan market in Korea has grown tremendously. In June 2010, it was found that 5.8 million use the credit business.
According to my research I mentioned earlier, 56.3% of consumer finance users have had used(?) private loans. Half of private loan users were burdened with 5.5%~10% of monthly interest, which is 66%~120% of yearly interest (Jong in Lee, p.172).
Table 5: The Interest on a private finance loan services level of monthly interest less than 5.5% 5.5%-10% 10%-20% 20-30% more than 30% total* number of cases 40 150 18 52 35 299 percentage 13.6 50.8 6.1 17.6 11.9 100.0
Source: Jong in Lee (2010), p.141.
Ⅲ
. Regulations on unfair and/or illegal acts in Korea
First, there are the Credit Business Act, which is similar to Japan's the Moneylending Business Law' and the Investment Law, and The Interest Limitation Act, and the Fair Collection Service Act, which was established in 2009. There are also the Fund-raising Regulation Act and, the Credit Information Use and Protection Act to protect users of financial services toward ordinary people.
1. The Credit Business Act
The Credit Business Act was established in October 2002 to foster the moneylending business and regulate high interest rates, and it has been revised 8 times since then. The main purpose of this law is to regulate interest rates of financial institutions for the ordinary people and the moneylenders.
The Credit Business Act outlines that maximum annual interest rate be settled by presidential ordinance under the limit of 50% annually. Under the enforcement ordinance if it, maximum annual interest rate is limited to 39%. The law also supplements the regulation on illegal collection services.
2. The Interest Limitation Act
The Interest Limitation Act in Korea is applied to feneration of general credit loan contracts other than moneylending business. It was established in 1962 and revised several times. It was abolished once but was revived again on March 29, 2007.
The Act limits maximum annual interest rate of contracts related to feneration to 40% annually, and limits to 30% under it's enforce ordinance. So it is impossible to demand higher rates. Also, this law restricts advance decision of compensation, and defines the boundaries of "interest" to prevent creditors' taking advantage of the law.
3. The Fair Collection Service Act
The collection of illegal obligations(不法的な債権の回収) is not only a problem of private loaning, but it is true that illegal credit collection of lenders has especially been a big social issue.
The Act was established on February 6th, 2009. The purpose is to protect people from unlawful practices of debt collection.
This law prohibits collection of debts with interest rates that exceed lawful limits(39% annually in the Credit Business Act and 30% annually in The Interest Limitation Act).
It also prohibits presenting false documents or repeatedly making collect calls in order to reminding.
4. The Fund-raising Regulation Act
Act on the Regulation of Conducting Fund-raising Business without Permission (hereinafter, it called 'the Fund-raising Regulation Act) was established on Jan. 12, 2000 to "regulate fund-raising without permission and establish order in the finance market."
According to this law, "fund-raising without permission" is defined as acts of servicing finance without authorization or approval of the law or without proper registration (Article 2 of the Act).
This law will hopefully reduce damages due to fund-raising activities without permission, which includes many and unspecified, not the official financial institutions, proposing high profits to collect investments. Institutions without legal authorization cannot use titles such as "~ Finance," "~ Consulting," "~ Investment Banking," "~ Investment," etc.
5. The Credit Information Use and Protection Act
The Use and Protection of Credit Information Act (hereinafter called 'the Credit Information Use and Protection Act) was established in January, 1995. The purpose of the Act is "to foster credit information business, encourage effective use and organized management of credit information, and to protect privacy from misuse of credit information"(article 1 of the law; purpose).
Ⅳ. How to deal: compare and contrast with Japanese laws and administration
Until now that I have explained about the five Korean laws that deal with illegal acts in finance toward ordinary people, I will compare and contrast these laws with Japanese laws and administration; The corresponding Japanese legislation are 'the Moneylending Business Law' and 'the Investment Law', and The Interest Limitation Act. By focusing on the three common aspects of Korean and Japanese laws, which are regulation on interest rate, problem of over-indebtedness, and related administrative approach, we will ponder about the suggestions that arouse from these approaches.
1. Regulation on the interest rate
The main part of both Korean and Japanese laws concerning small-loan finance is limitation on interest rates. In Korea, starting from from July 2012, the annual interest rate cannot exceed 39% according to the Credit Business Act (article 8 of the Act). Also, the Interest Limitation Act is applied to general feneration except the case of registered moneylending business, so the interest rate cannot exceed 30%. On the other hand, in Japan, the maximum interest rate according to the Investment Law has significantly decreased from 29.2% to 20% after June 18th, 2010. Also, in case of the Interest Limitation Act, there is a limitation of 15~20%, although there is little compulsion.
By compare and contrasting both countries’ regulations on interest rates, we can find several important issues.
First, for both countries, establishing regulations on interest rates was a measure to ameliorate ordinary peoples’ burdens from the continuation of global super low interest rate, national economic depression, and problems related to consumer credit.
Second, while in Japan the maximum interest rate according to the Investment Law (29.2% to 20%) has been reduced 31.5%, in Korea it decreased only 10.2% (49% to 44%). This shows that Korea’ s small-loan finance interest rate is extremely high compared to Japan’ s. Considering the continuing global trend of low interest rate and regulations of advanced countries such as Japan and the US, it is necessary that the maximum interest rate according to the Credit Business Act has to be reduced in Korea.
Third, we find the issue on sanctions on illegal acts. In Japan, Article 5 of the Investment Law (punishment against high interest rate), established in 2004, inflicts penalty below 5 years or a fine under 10 million yen to those who takes or asks contracts an annual interest rate exceeding 109.5% between individuals or that exceeding 29.28%(now 20%) with moneylenders. For the efficacy of such legal sanctions, judicial authorities take stance of punishing with actual prison, and/or, imposing both detainments and monetary penalties simultaneously. In Korea, violation of the Credit Business Act or the Interest Limitation Act is considered as civil and criminal cases, but since the penalties are limited to monetary penalty, it is not effective enough to restrict illegal
acts. Therefore, it is necessary to encourage environment of punishment with actual prison or imposing both detainments and monetary penalties simultaneously as in Japan.
2. Problem of excess loans
The problem of accumulation of debt and default of low income and/or low credit consumers is one of the main consumer problems related to consumer credit. Beginning on June 18, 2010, Japan has carried out regulation of total amount of loan, which limits the amount of loan to be under one-third of annual income.
In Korea, although not in the form of Japan’ s total amount regulation, current laws on moneylending business bans such accessive loan. The article 7 of the Credit Business Act states the moneylenders' responsibility to be aware of the business opponent's situation of income, property, and loan. However, this law is not that effective since there are no specific sanctions on violation of the law, only fines.
Therefore, it is necessary to establish penal regulations on moneylending business, and clarify the objective level of redemption ability in subordinate laws.
However, except mortgage loans, the Korean government has yet not begun discussing about specific regulations in small-loan finance services such as total balance of borrowing, like those in Japan. A primary background of it is based on concern and possible constraint to the small-loan borrowers caused by the regulation in Korea.
3. Administrative approach
As mentioned above, the Korean administration has been struggling to prevent consumer damages related to the consumer credit or small-loan finance, through establishing laws such as the Credit Business Act, the Interest Limitation Act, and the Fair Collection Service Act. Korea’ s consumer finance policy authority is expecting consumer problems to settle down to some extent, with the help of these laws and regulations.
Also, Korea is seeking solutions with several administrative approaches. For example, there are programs to support private organizations that are being enforced by ‘ comprehensive measures toward consumer finance of 2010’ (late April 2010) and ‘ comprehensive reenforcing measures toward consumer finance of 2011(15th April, 2011).
In Korea, three major loan government-supported programs for low-income and low-credit people are becoming popular. They are 'saehimangholssi loan' which means a program of the New Hope Spore Loan, Miso Finance in other words Micro-credit loans7, and the Hassal loan8.
Similarly, Japan has established ‘the Over-indebtedness Countermeasure Office’ (多重債務者対策本 部) in 2006, ‘the Learned (有識者)Meeting’ which occurs within a village, and ‘the Over-indebtedness Improvement Program’ in 2007. But Japanese policies do not seem to include programs in the direction to expand provision of consumer finance like those of Korea. In Korea, there are many critics in the market and the academic field about the administration’s active policy for credit expansion. We will need to wait longer to conclude the effects of the policy.
On the other hand, Japan’s administration is struggling to solve the problem of the ‘Gray Zone Interest Rate.’ Until recently, it was possible for moneylenders to do business effectively because of the Gray
7 The 'Miso' has another positive meaning of smiling or happiness in Korean.
Zone Interest Rate. But in June, 2010, the law has been revised to limit maximum interest rate to 20% (出 資法), disabling the Gray Zone Interest Rate. In Korea, there is a still a difference in interest rate limits between current the Credit Business Act(39%) and the Interest Limitation Act(40%, 30% on it's enforcement ordinance). It is necessary for its government to settle such difference in laws so that consumer damages due to Gray Zone Interest Rate are reduced and prevented.
Ⅴ
. Conclusion
As I explained earlier, the problem of ‘syomin kinyu’ (庶民金融) or consumer financing in Korea is becoming a major issue in policymaking, not only in financial policies, but also in the efforts to protect consumers. This is no different for Japan, which has a relatively long history of consumer financing services. Thus, I suppose that the recent legislative and administrative efforts in Korea, including those not mentioned in my presentation, suggest a lot for Japan’s policymaking toward solving consumer problems. In the future, I hope to investigate the parts that I did not go over and compare them with Japan’s case, with professionals from Japan if possible.
What I want to add is that unlike in Japan, the role of professional organizations for problems of syomin kinyu is not that active in Korea, despite the fact that civil organizations have a big voice in society. In Japan, there has been a lot of continuing support and efforts from professional organizations other than the government to ameliorate consumer problems. The Japan Federation of Bar Associations is an example. The case in Japan could become a model for organizations in Korea.
Overall, my presentation was mainly focused on measures to regulate moneylenders' side of the problem and suppress the increase of over-debtors or delinquent borrowers. However, it is important to consider the experts' arguments that these regulations can encourage the over-indebted people to become the target of high interest rate private loan such as Sarakin (consumer finance).
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