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New Loan Interest Rate Ceiling: 40%

Posted June. 05, 2006 03:16,   


A law restricting the maximum annual interest rate of private loans below 40 percent is planned to be implemented late next year. The Interest Rate Restriction Law was abolished in 1998 when there was an economic crisis.

The Ministry of Justice (MOJ) declared on June 4 that it would prepare improvement laws related to lives and economy of common people and that it would submit them until the end of this year.

Focused On Protecting the Economic Rights of the Disadvantaged—

The Interest Rate Restriction Law’s key point is: “Under presidential decree, when borrowing and lending loans, the maximum annual interest rate should not surpass 40 percent.”

It is a measure to protect common people who are relatively highly dependent on private financial institutions. Since the restriction law is civil law, violators will not face criminal charges, but annual interest rates over 40 percent will not be recognized.

The bill will be applied to private loan lenders such as individuals and unregistered lending businesses, and will exclude businesses that have registered under the Loan Business Law implemented since 2002. The MOJ also stated that it will pursue measures to lower the current annual interest rate ceiling of 66 percent for loan businesses.

The Interest Rate Restriction Law was created in 1962 but abolished in January 1998 by IMF request. After the abolishment, the established financial businesses’ average annual interest rate for loans was between 40 to 50 percent, but the average interest rate of private loan businesses was an astounding 223 percent, exacerbating the problems of common people.

Adoption of Insurance to Return Rent Deposit Money—

Tenants renting housing will be obliged to sign up for deposit money return insurance.

If the renting period is over and the owner of the house does not return the deposit money, the insurance company will pay the tenant the money and receive the deposit money from the owner. Hence, the Housing Tenant Protection Law will be revised.

In addition the enactment of the Special Law to Protect Guarantors will be pursued. This is a system that notifies a debtor’s credit record and amount to guarantee to financial institutions when they are concluding a guarantee agreement with the debtor.

This will prevent cases where people are unable to refuse the requests of family members or friends to become guarantors and suffer losses.

Methods to pressure the payment of debts such as going to the homes of debtors in the middle of the night will also be completely forbidden.

Furthermore, in order to eliminate the unfair practice of farmers receiving prior payments and selling their entire crop in their fields, the MOJ decided to revise the Law on the Stabilization of Prices and Circulation of Agricultural and Fisheries Products.

One of the major revisions in the case of sales of fields is guaranteeing prior payment to be over 30 percent of current prices, and if the prices of crops increase after the contract, the buyer and farmer divide the profit.

Revision of Commercial Law Aimed at Increasing Transparency—

The commercial law on corporations will be revised and will adopt an executive committee system and a dual representative lawsuit system.

The executive committee members will be appointed by the board of directors selected by the shareholders and will include the CEO and CFO, who have the responsibility to report to the board of directors.

Currently, the board of directors has all the authority on the corporation’s decisions, and the implementation of decisions and supervision, but when the executive committee system is adopted, it will only function as a supervisor while decision-making and implementation will be conducted by the executive committee. The corporations, however, are free to decide whether or not to adopt this system.

The dual representative lawsuit system allows the shareholders of the parent company to file class action against the head of the branch company, in case the branch company does not hold liability against its own malpractices.

The dual representative lawsuit system will only be permitted if the parent company holds over 50 percent of the branch company’s shares.

In order to revitalize the economy, the current minimum required amount of capital, which is 50 million won, will be abolished. The U.S., Japan and Hong Kong do not have laws requiring a specific minimum amount of capital.

Tae-Hoon Lee jefflee@donga.com