Chairman Choi Jong-ku of the Financial Services Commission (FSC) will try to cut the maximum interest rate on defaulted loans, now standing at 14 percent per year. He also plans to make insurance firms to make payments to those who have yet to see any money and penalize those who fix the share prices.

The FSC chairman, at a media session on Sept. 4, touched on the direction of the financial policies, promising he will overhaul the financial system after setting up a target for each financial sector by the end of the year. The chairman said he will hold a public hearing to discuss the appropriate interest rate for defaulted loans by banks, which are excessively high in Korea compared to those in foreign banks, ranging from 3 to 6 percent in the U.S., 2-5 percent in Germany and 6 to 9 percent in Korea. 

He will bring the penalty interest rate to an appropriate level. He also said insurance firms should find insurance policyholders who have yet to get a payment, and help them get their money, which totals around 7.6 trillion won for over 9.47 million cases. He said the FSC will consult with insurance firms on unclaimed insurance being paid to insurance policyholders.

Chairman Choi also said FSC will find ways to punish those who fix stock prices in violation of the securities market laws and bring order to the financial market. He pledged that the case of Lee Yu-jong, a candidate for the Constitutional Court judge, who is suspected to have committed illegal dealings in the stock market, will be handled no differently than any other case.

The FSC also will set up a special unit on “economic democratization” this year, hinting that it may be a bureau-level unit in consultation with related government offices.

He also touched on the FSC’s measures to deal with household debts, saying that the measures will be based on four major areas, including: improving the ability to pay back household debt; improving the capacity of the banks to analyze borrowers’ credits before issuing loans; protection of the financial viability of borrowers; and curbing demand for funds at an appropriate level. 

He added that the DTI regulations are being studied to regulate all financial lending in the country, including Seoul and some local areas where loan demand is overheated.

Financial Services Commission Chairman Choi Jong-ku highlighted local banks’ overdependence on gains from household loans as a hurdle to wage-led growth and said he would lower the maximum interest rate to 24 percent from next year. In his first press conference as the head of the nation’s top financial regulator a week after he took office, Choi pledged to address banks’ overreliance on mortgage loans, saying they have distanced themselves from their original role of screening risks and instead shifted the risks to households and businesses.

“Commercial banks have shifted their focus to household loans from corporate loans, especially after the financial crisis here in 1997, which has raised doubts on whether the financial sector contributes to job creation and national productivity,” Choi said. “The banks’ behavior to maximize their profit-taking has caused economic pollution and external diseconomies under 14 percent.”South Korean lenders’ ratio of household credit to all lending surged to 43.3 percent as of 2016, compared to 27.4 percent in March 1998, according to data from the Bank of Korea.

Out of all household loans extended by banks in June, mortgage loans accounted for 75.2 percent. Driven by eased regulations for mortgage loans and the booming real estate market, Korea’s household debt reached 1,344.3 trillion won ($1.19 trillion) in 2016, after seeing a steeper rise since 2015.