Shaw Capital Management Headlines : South Korea: High Interest Charged by Finance Companies

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http://www.syminvest.com

Source : THE DONG-A ILBO

Jul 2010

Seul, South Korea, July, 24 2010 – An investigation into finance companies began Friday after President
Lee Myung-bak complained a day earlier that the companies are charging high interest rates while
visiting a branch of a micro-finance foundation.

After a meeting with chief directors of micro-finance foundations at the Bankers Club in Seoul Friday,
Financial Services Commission Chairman Chin Dong-soo told reporters that a probe will begin into
finance companies imposing high interest rates on loans to individuals and devise countermeasures.

“A 30-percent interest rate is very high,” he said. “Through an in-depth investigation, we will devise
measures to ease the burden on the working class.”

“The main operations of finance companies are leasing, installment financing and providing auto loans,
but unsecured loans account for a significant share of their operations,” he added. “This means demand
for livelihood funds and emergency loans is high in the market, but interest rates in the 30-percent level
is excessive.”

The marketing share of unsecured loans among finance companies is around five percent and the
amount of extended loans is about three trillion won (2.5 billion U.S. dollars). The interest rate on loans
for individuals at such companies is an annual average of 32.6 percent and the default rate is near the
legal limit of 44 percent.

Financial authorities estimate that the financing costs of finance companies are five to nine percent and
that bad debt reserves are more than five percent. Though costs for management and collecting from
borrowers are included, the combined cost of financing is under 10 percent, making 30 percent
excessive, they said.

To improve the interest rate systems of finance companies, the commission and the Financial
Supervisory Service will soon set up a fact-finding team to analyze financing and marketing costs of such
companies and conduct on-site investigations if necessary.

Financial authorities will also crack down on the illegal practice of paying high fees to loan collectors to
increase their numbers.

Finance companies will also be encouraged to make interest rate cuts by removing handling fees similar
to upfront interest. Generally, they impose around three percent of the loan amount as a handling fee.
Credit card companies, which had been at the center of controversy for charging high interest for cash
services, eliminated handling fees early this month.

Separately, financial authorities will reduce the interest burden on the working class, who are excluded
from institutional financing, by invigorating micro-finance and the “sunshine loan” system designed to
lend startup and emergency funds to low-income households at low interest.

Chairman Chin said, “After the Asia-wide foreign currency crisis and the latest global financial crisis, the
financial situations of low-income households with low credit ratings have gotten worse,” adding, “We
should help the working class` finances to gradually allow a soft landing by expanding guaranteed
sunshine loans.”

He also told the micro-finance chief directors, “I urge operators of micro-finance foundations to return
to the basics and make every effort to help low-income households with low credit ratings.”