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Loan Guarantee Problems Increasing

Posted September. 25, 2006 07:04,   


Scene 1-

Mr. Kim (39), who lives poorly in a rented room after he was divorced from his wife, sealed a document with his thumb the year before last when his landlord asked for a guarantee, saying he was about to be accused of defaulting on the money loaned from a mutual savings bank. The landlord absconded without repayment, and Kim had to take the liabilities of 60 million won.

Scene 2-

Mr. Choi (52), who got a job with a freight forwarder in 2000 after more than three years of being jobless, was requested to stand a guarantee for freight charges by his company. Choi complied with the request without informing his wife. The court recently told him that he should pay 60 million won, because he had not canceled the guarantee agreement with the insurer although he resigned.

Guarantee troubles associated with loans from non-banking financial institutions, including savings banks, credit unions, community credit cooperatives, and insurance firms, are growing serious. In particular, as most people who stand guarantees for non-banking sector loans are at low-income levels, careless guarantees can result in bankruptcy.

As of April, 3.34 million people guaranteed 179 trillion won-

According to a report by the Financial Supervisory Service and Korea Federation of Banks, which was analyzed by Democratic Labor Party lawmaker Shim Sang-jeong yesterday, 3.341 million people are involved in guarantees for a total of 179.6 trillion won worth of non-banking sector loans as of the end of April this year. The per-capita average guarantee amount is 53.75 million won, 8.42 million won (18.6 percent) up from the end of last year (45.33 million won). The amount of individual guarantees for banking sector consumer loans is on the decrease: 9.3 trillion won in 2001, 8.5 trillion won in 2002, and 6.6 trillion won in 2003.

Banks deal mainly in “safe loans” secured by real properties, a trend which is making the amount of loans with a guarantor decrease. However, low-income people cannot do anything but rely on “risky loans” from non-banking financiers, including savings banks and insurers which need guarantees because they have no security.

When low-income debtors go into insolvency due to the high interest of non-banking sector, guarantors should take the liabilities for the principal and interest.

Hard to control financiers’ unreasonable request for guarantee-

Mr. Park (44), a curate, has stood surety 19 times for over 10 years since 1993. He could not decline rector’s request for guarantees. The guarantees amount to 320 million won in total.

Dunning letters for repayment has been concentrated on Park since the rector was accused of fraud.

Park sold even his house, but is still under debt amount totaling over 100 million won.

Those who stood surety, like Park, regret what they have done, saying, “I was compelled to do so, for fear of ruining a relationship.”

The problem is that financiers unreasonably request guarantees by abusing such concerns about relationships, but the government authorities have no way to control it.

European countries notify guarantors beforehand of risks associated with guarantees, including debtors’ financial conditions and credit ratings.

Legislation to protect guarantors-

However, there is no regulation to control joint guarantee system in Korean financial authorities. Each bank can set its guarantee limitations at its disposal.

Gwon Jeong-sun, a lawyer of the People’s Solidarity for Participatory Democracy, emphasized, “It is hard to estimate the number of guarantors disposed to risks of chain-reaction bankruptcies caused by debtors’ insolvencies. We need to legislate a law to protect such guarantors.”

Lawmaker Shim announced, “We will move forward with a special law to protect non-banking sector loan guarantors.”