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State loans for risky borrowers

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I think lending money to risky borrowers is a stupid idea.  Wasn’t this one of the main reasons for the financial crisis in 1997?  It may be  a short-term solution for low-income earners (as a critic mentioned in the article) but will spell disaster in a few years or less.  A way to win votes or not, risky borrowers have low-credit rating for a reason Einstein!

State loans for risky borrowers
Move ahead of local elections could raise household debt risks, say critics
신용 낮은 사람에게 연 10%대 대출
April 08, 2010

The government has decided to increase lending to low-income families with poor credit ratings in a controversial move that some analysts believe will raise the risk of debt defaults among households.

The announcement comes ahead of critical local elections in June. Critics said the scheme, which will lend up to 10 trillion won ($8.9 billion) over the next five years, is meant to win votes for the government in spite of potential dangers it poses to the financial system.

The decision by the government to tap new loans for distressed families from secondary financial institutions such as saving banks and mutual financial companies coincides with the growth of debt among households and fears of increased credit defaults.

“The government plan may ease the financial situation of low-income households with bad credit ratings in the short term, but in the long term it has the potential to damage the government’s financial position and that of financial institutions,” said Kang Seog-hoon, an economics professor at Sungshin Women’s University.

“This is a move targeted in winning votes, but it is a dangerous step as it could also bring moral hazard among lenders as it could send out the message that it is easy to get loans even if you don’t have the ability to pay them back,” he said.

The Financial Services Commission said yesterday that the ruling Grand National Party, the Finance Ministry and other government departments had agreed on loan measures.

The FSC said the new loans were meant to prevent low-income families from borrowing from loan sharks who demand high interest rates.

Borrowing from loan sharks has increased from 4.1 trillion won in September 2007 to 5.9 trillion won as of last September.

Saving banks will be contributing 40 billion won annually in credit guarantees, while mutual financial companies including the National Credit Union Federation of Korea and the Korea Federation of Community Credit Cooperative will be adding 160 billion won in annual credit guarantees.

Credit guarantees from the central and local government will amount to 200 billion won annually.

Although interest rates charges on the loans will be left up to the decision of each financial institution, the annual interest rate will be set below 20 percent.

The FSC said the government-backed credit loans will likely replace the 10 trillion won in borrowing from loan sharks.

Additional measures will include reducing the maximum interest rate allowed to be charged by loan sharks from 49 percent to 44 percent starting from June.

The government said it will consider cutting an additional 5 percentage points charged on such loans after monitoring the financial market situation a year later.

The government promised to increase credit support for low-income families that prove that they are working to improve their credit rating by paying back loans on schedule.

“By expanding the government-guaranteed loans on low-income borrowers who lack the ability to put up collateral we hope to lower the burden on loan interest from the current mid-30 percent level to mid-10 percent,” said Hong Young-man, an official at the Financial Services Commission.

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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Written by recruiterinkorea

April 8, 2010 at 3:22 pm

Posted in Uncategorized

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