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South Korea: Expectations for New Micro-Finance Loans Rise Among Skeptics

South Korea is launching a new micro-finance loan initiative after a grim portrait of the economy was unexpectedly disclosed before Korean president Lee Myung-bak during a meeting with struggling low income earners. A few days later, the Finance Service Commission came up with a micro-finance system, called ‘Sunshine loans’, aimed at brightening the dark financial situation for low income households by offering micro-loans with decent 10-13 percent interest. The response to the news is positive so far, but with a trace of apprehension.

When you turn on prime time Korean television, it feels like you cannot get to one single regular program without watching a bunch of commercials with catchy songs that repetitively remind people of quick and easy loans. The unending cascades of loan commercials are competitively luring the crumbling and financially vulnerable class with the promise of safe money. People fall into a vicious cobweb once they make the first phone call. The harmless-looking number which people naively call to find out at what interest rates they can get loans, slash their credits down. When people visit banks to get loans, they find out the only available money are loans with extremely high interests. Disappointed and increasingly desperate, they turn to non-bank financial institutions whose interest rates are just as high and end up finally sending distress signals to the loan lenders or loan sharks.

This omnipresent but neglected truth came to light during one incident. As South Korean newspaper DongA Ilbo retells the story, it was a casual conversation between President Lee Myung-bak and a local shoe vendor. The 42-year old vendor, whose last name is Chung, said that a capital company owned by a big corporation gave her loans with 40-50 percent interest rates due to her low credit level (later it is discovered to be 35 percent).

Dong-soo Chin, the chairman of the Financial Services Commission was there when the conversation took place.

“이자 많이 받는 것 아닙니까, 금융위원장. 사채(私債) 하고 똑같잖아요.”(이 대통령) “(대출자의) 신용이 좀 안 좋아서 그런 것 같습니다.”(진 위원장) “신용이 좋으면 여기서 돈 빌리나요. (시장 상인들이) 구두 팔아서 40% 넘는 이자를 어떻게 갚을까. (사채업자들의) 일수(日收) 이자보다 더 비싸게 받아서 어떻게 하지요?”(이 대통령) “(캐피털사가 돈을 마련하는) 조달 금리가 높습니다. 채권 이자로 하니까요.”(진 위원장)” “(정 씨의 대출 서류를 계속 읽어보면서) 사회 정의상 안 맞아. 상상도 못했어요. 내가 현장을 몰랐다는 것과 똑같은 거예요.”(이 대통령)”

President Lee: “Don’t you think the interest rate is really high, Mr. Chin? It is almost same as the private loan.” Chairman Chin: “I believe it is because her credit is not good.” President: “If her credit were good, would she be borrowing money in here? How can a local vendor afford 40 percent interest by selling shoes? It is even higher than the daily payment one has to make to loan sharks.” Chairman Chin: “The capital company’s borrowing rate is high as it uses the bond rates.” President Lee: (while keeping his eyes on Chung’s loan papers) “This is not a social justice. I had no idea about this. I had no clue this was happening in real life.”

The uncomfortable conversation was followed by the President’s rebuke on the capital companies. The Sunshine Loans start from today. Financial institutions will lend a total of 10 trillion won (USD $8.3 billion) to those with an annual income of less than 20 million won and whose credit ratings is below the level 6.

One blogger, Greennb commented that as encouraging as the President’s response to the reality has been, market manipulation should be done very discreetly and with solid strategies. The blogger warns that when the finance ministry rushed into forcing them capital companies to lower their interest rates, it may end up making an even larger mess than now, since the risk created by giving loans to people with low credits is still there.

서민들이 은행에서 대출을 받기란 참으로 어렵습니다. 그렇다면 고금리를 물더라도 제2금융권 즉 제도권 내에서 대출을 받을 수 있도록 해야 하지 결코 금리를 낮추라는 강요에 의해 캐피탈 사가 서민금융을 외면하도록 해서는 안 된다는 것입니다. 캐피탈 사가 서민금융을 외면하기 시작하면 결국 이들은 사금융, 대부업체로 몰리게 될 것이고 이러한 대부업체들의 불법적인 채권추심관행에 노출되도록 방치될 수 있습니다. 사회 안전망의 구축을 유지할 예산이 부족하다보니 서민들은 금융기관에 어려운시기를 버티기 위해 기대지 않을 수 없게 됩니다. 그러나 금융기관들은 서민대출의 리스크를 감내하지 않을 수 없는 것입니다.

I know it is very hard for low income households to get loans from the banks. But still, even if it means they will be asked to pay higher interests, our goal is to keep them under the thresholds of the proper financial system or at least under non-bank financial institutions. The government should not be forcing the companies to lower the interest rates which will eventually lead the companies to reject giving loans to low income earners. Once the capital companies shoot down loans to ordinary citizens, the people will have to turn to private loans and local lenders and expose themselves to the private lenders’ illegal debt collection practices. Since the government budget is insufficient for building the social safety net, people grow dependent on financial institutions to weather hard times. But for these institutions, they cannot ignore the risk created by giving loans to low income families.

The Sunshine loan is not the only government loan designed to help ordinary people. The Miso credit loan (Miso in Korean means “smile”) which began last year is another micro-finance loan aimed at helping poor entrepreneurs.

The blogger Shs781115 said that Sunshine loans can cover the blind spots of the Smile loans and stressed how the policy actually operates is what matters the most.

이와 비슷한 것이 미소 금융인데..이것은 햇살론과 엄연히 다르다..미소 금융운 미소 금융재단에 의한 비영리 상품이며 저소득층의 창업 자금 대출에 초점을 맞춘 반면에..햇살론은 기존 금융기관에 의해 시행되는 상품이라는 점이고 대출의 성격도 긴급 생계자금을 위주로 한다.
그래서 미소금융의 지원을 받지 못하는 계층까지 확대된 결과 그 혜택을 받는 사람이 1700만명에 해당할거라는 통계도 있다…문제는 정책이 아니라. 운영의 유연성과 미학을 발휘하는 것이다.
이명박 정부는 과거 그 어떤 정부들보다 훨씬 많은 서민 대출 상품을 쏟아내고 있다. 이번 햇살론이 미소금융의 혜택을 받지 못하는 또 다른 계층을 위한 것이라는 점에서 기존 미소 금융의 한계를 반증하는 셈이 된다. 이번에 새롭게 시행되는 햇살론에 대해서도 유연적으로 적용하고, 그 취급기관을 확대하면서 정책의 방향과 실제 대출 수혜자간의 괴리가 없는 가를 면밀히 살펴봐야 할 것이다. 햇살이 진짜 서민을 위해 따듯하게 비칠지, 아니면 오히려 그 햇살이 서민을 더 따갑게 할지는 그 운영의 미학을 어떻게 보여주느냐…바로 그것에 달려 있는 것이다.

The Smile loans look very similar to the Sunshine loan, but these are apples and oranges. While the Smile loan is the non-profit loan offered by the financial foundations to provide small business with initial investment money for low income families, the Sunshine loan, on the contrary, is the loan given from typical financial institutions lending quick money for the low income household’s emergency situations. One statistic predicts that if the Sunshine loans were to cover all those who cannot get Smile loans, around 17 million people would get Sunshine loans… What matters is not the policy itself but how the government runs with it with flexibility and management skills. The Lee administration has poured out numerous loan packages for low income families, lot more than any other former governments. However, the fact that the sunshine loans are being created to cater for certain demographics uncovered by the former Smile loans, proves what limitations the Smile loan has. The government needs to apply the Sunshine loan with more flexibility, get more financial institutions involved, and check thoroughly that there is no gap between the target group for the loans and the actual beneficiaries. Whether Sunshine will warm its people up or burn them – depends on the government’s managerial skills.

Only 24 hours have passed since the new loan system was launched and there are numerous questions from Koreans on the internet asking the same thing: whether they are eligible for the loans. The questions are rapidly pushed away to next pages and replaced by the exact same questions, all desperately searching for a way to survive in this sweltering heat.


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