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🇰🇷 South Korea /Economy & Trade

History of Failed 'Interest Rate Cliffs' Improvement... Will 'Cruel Finance' Change This Time?

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

Analysis Named sources Context piece
  • A senior South Korean official raised concerns about the "cruel finance" system where the most desperate pay the highest interest rates.
  • The current system, relying on credit scoring, creates a gap where individuals with moderate creditworthiness struggle to access loans at reasonable rates.
  • The article questions whether financial institutions, granted special privileges, are fulfilling their social role by prioritizing stability and profit over serving those in need.

Kim Yong-beom, a senior official at the Blue House, has ignited a discussion about "cruel finance" by questioning why those most in need of loans face the highest interest rates, while the financially secure benefit from lower ones. This issue, though not new, has gained traction following Kim's public remarks.

Kim's critique highlights a significant gap in the credit system. While financial institutions can differentiate between borrowers likely to repay and those unlikely to, a large segment of individuals with moderate creditworthiness falls into a gray area. Banks tend to lend only to the most creditworthy at low rates, while second-tier financial companies charge high rates to those deemed riskier. This leaves individuals with intermediate credit profiles struggling to find loans at reasonable interest rates, forcing them to bear higher costs if they can access credit at all.

Why should the most financially secure enjoy low interest rates, while the most desperate pay the highest interest?

— Kim Yong-beomQuestioning the fairness of the current financial system.

Kim, a seasoned economic and financial official, argues that this situation is not a natural outcome of market economics. He points out that financial institutions, which are granted the privilege of creating money, have a social responsibility to efficiently allocate funds. However, many banks prioritize stability and profit, focusing on secure investments like apartment mortgages and high-credit loans, neglecting those who might need credit but fall outside these safe categories.

Is this truly a natural outcome of market economics? Risk is continuous, but finance ruthlessly cuts it off at the boundary. And those pushed beyond that boundary wander outside the market, bearing higher costs.

— Kim Yong-beomDescribing the harshness of the credit system's boundaries.

The article suggests that this focus on stability and profit leads financial firms, including mutual finance institutions like agricultural and fisheries cooperatives, to concentrate on real estate project financing rather than fulfilling their core function of providing accessible credit. Even institutions designed to serve the public, like mutual finance, are criticized for becoming wealth management tools for the affluent, with funds often being deposited centrally and invested in real estate.

Kim emphasizes that demanding financial institutions fulfill their social role, commensurate with the privileges they hold, is not market intervention but a matter of contract fulfillment. The current system, he implies, fails to adequately serve the broader public, creating a "cliff" in interest rates that disadvantages a significant portion of the population.

Demanding that financial institutions fulfill their social role, commensurate with the privileges they hold, is not market intervention but contract fulfillment.

— Kim Yong-beomAsserting the responsibility of financial institutions.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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