Korea’s National Assembly stalled

The delayed passage of economic bills including bills on private loan business regulation and business restructuring promotion is likely to cause a turmoil in Korea’s economy. Against this backdrop, starting next year, there will be no way to legally control deadly interests on private loans and all work-out processes will be stalled, endangering solvent businesses to fall into bankruptcy.

Earlier in November, the parliamentary committee for national policy agreed to extend the Business Restructuring Promotion Act, which is scheduled to expire at the end of this year, for another 2.5 years. Lawmakers have also agreed that the interest limit for private loans should be lowered from 34.9 percent to 27.9 percent. The National Assembly, however, has been focusing on political fights irrelevant to pressing issues. As a result, the committee was not able to hold any discussion on the two bills. Even if the ruling and opposition parties reach a last minute deal within the next few days, the bills have to go through multiple sessions, making the chance of them being passed within the year actually near zero.

The ones damaged the most by the crippled National Assembly will be middle class citizens and businesses. The government is placing a cap on private loan interests to 34.9 percent per annum to protect the middle class. But the pending of the passing of the revised bill will temporarily leave the interest rate unregulated. This means that there will be no legal foundation to deter lenders from raising the interest to 50 percent, 100 percent.

Of course this is very unlikely to actually take place, but the insiders foresee that some smaller-sized lenders might raise their interests. Many of them are already applying the limit or close to the limit. Among 40 registered lenders who made 10 or more transactions during the third quarter, 25, or 62.5 percent of them, imposed the highest legal interest rate of 34.9 percent.

Companies are also expecting a big confusion. If it becomes impossible to progress work-outs after the expiration of the Business Restructuring Promotion Act, businesses must choose between signing an agreement with creditors and going under legal management. The former requires a 100 percent agreement by the creditors and the latter makes it difficult to get new loans.

Yim Jong-yong, chairman of the Financial Services Commission, has also expressed frustration regarding the pending situation. "Economic bills must be passed regardless of political spectrums,” Yim said at a press conference on Monday.“It is lamentable that the laws have not been passed even after the two parties and the government reached an agreement and finished the drafts.”

jikim@donga.com