Elgin beat me to this little gem in the Jooang-ang, but I wanted to look up the right number first.
The numbers in that article are either nonsensical or disturbing. The two numbers for “problem borrowers” add up to 3.3 million people. However if you look at the NSO survey, there are 14.3 million households. This leads to 25% of all households in Korea have a serious debt problem. Either exaggeration, or problematic.
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I know people who work for legal loan companies. I was told that the ones who go to the illegal lenders have essentially stiffed every legal one and/or don’t own any property to use a collateral.
Some borrowers are businessmen trying to save their struggling companies; but most of the borrowers are people who want someone else to fund a lifestyle that they can’t afford.
…and now you know why there isn’t a shortage of new luxury cars on the used car lots (all repossessed).
Could just be my glass eye but this seems to be within my purview: whats a stastic?
Damn lack of spell checking on the title. Thanks MrChips, title changed.
Mr. Chips, we have a similar fault. My one eye doubles my eyesight, so things don’t look half-bad.
Whoah, hold on a sec! Just what is that makes you think 25% of korean households have a serious debt problem?
Are you implying that, by definition, everyone who borrows money from a non-bank lender is automatically in major financial trouble? From the article, the average size of the loans is only 5 mil. And just because the reporter chose the word ’shady’ doesn’t mean all 10,000 registered lenders constitute some sort of massive, invisible lending mafia that runs around beating up a quarter of the population.
What if (proposal for your consideration), the vast majority of borrowers simply didn’t want to bother with the banks’ bureaucratic hassles and all the paperwork, and knew they just needed a short-term loan, so they borrowed a few grand by a much easier method, paid it off within a month or two, and everyone went away happy? And that some small percent of deadbeats got beat up for abusing an otherwise fairly healthy system.
Is there ANYTHING in the Joongang article to dispute such an interpretation? Korea’s official banks are reporting delinquency rates of only 1% (admittedly, this could be underreported, but you can’t keep disastrous levels of NPLs on the books forever).
“Damn lack of spell checking on the title.”
Should that be “Dram lack of spell checking”
Take a walk through some of the quiet, traditional bastions of upper-class Korea in Seoul for “dae chul” stickers and check out the amount of sticker trash on the subway — look for the details. Also, watch the regulars at the shijang and what their mood is. It does not take a KEI analyst to tell me that things are not good for the average household.
Linkd,
You’re right. Most loans are about 10 million won or less. To get that, the borrowers place their cars (has to be a fairly new one) as collateral…but many can’t pay back the loans (don’t know the percentage) and their cars get repossessed by the lenders, which is why there are plenty of shiny new cars at the used car lots.
‘…admittedly, this could be underreported, but you can’t keep disastrous levels of NPLs on the books forever…’
NPL’s at Korean banks are held to acceptable levels these days, and most firms involved with the dipensation of those distressed assets have shifted their focus to other markets (e.g., China). Fact is, those who used to sell are now buying. The Korean NPL market is flat.
Again, with reference to #8, what if we just let ourselves get away from the too-simple idea that “bank loan = good ; non-bank loan = bad”. Korea’s banks, like banks in every country, are shackled by a host of government interventions in their lending activities. Second, Korea has lots of rich people who are looking for ways to diversify and make better returns on their money. Why not put some into the private loan market? The source of capital for most agents is rich individuals - it’s Koreans lending to Koreans, with the agent as a broker. And why not offer loans in the rich neighborhods, where the default risk is lower?
One of the metrics by which an advanced economy is identified is by the decreasing percentage of loans, both corporate and personal, that go through banks.
Linkd, is that a *good* thing though. Not in my book because, if one were to assume that this wave of private lending is sponsored by rich people, would it not be better to simply move this money overseas into property — which is easier to do nowadays — instead of putting it into activities that stress the society in ways that are difficult to even measure? I did not mention the potential for tax evasion either.
First, I should say I have no particular knowledge of this market in Korea. I’m commenting in this thread based on my belief of how it probably operates, and with some ire that a hack piece of sensational tabloid writing in the Joongang is being interpreted as actual economic reporting.
Second, god save us from well-intentioned meddlers who think they know what is ‘good’ for an economy. Singapore is only example of long-term successful central planning I can think of, with abundant other examples of varying degrees of failure.
Finally, for wealthy individuals who already have stocks, real estate and cash savings, I see nothing wrong with additional sources of diversity. For borrowers, I see nothing wrong with offering them more choices. The feedback mechanism that tells a borrower whether he’s getting in over his head is the interest rate. If he gets quoted a rate of 360%, perhaps he should ask why (and, obviously, not take the loan). Denying people access to finance is also a stress on society, as it hampers entrepreneurship and therefore, growth.
Oh, and tax evasion is the privelege of anyone who can afford professional tax advice, unfortunately. The only weapon governments have against this is simplification of their tax codes to eliminate loopholes. A flat tax is the ultimate solution.
When it’s a choice only between not getting a loan or getting a loan bearing 100+% interest, what sort of choice is that?
And look at who is doing the lending.
It is parasitism, not a growth engine.
There’s a reason “advanced economies” do not allow a usurious private lending market (or at least try to clamp down on it) and Korea should be commended for trying to follow that example.
linkd, what happens when a South Korean businessman goes bankrupt?
Just bad credit, and that’s it?
No.
I think it’s a crime. I’m pretty sure it is.
Anyone near bankruptcy will take that 360% loan, do whatever you can before you become a criminal in South Korea.
I’ve known someone who is a Ko-ri-dae-gum up ja, and known someone who went bust on his business.
I think the business law is bad and so is the guy charging 360% interest.
I get fuzzy on the details of how collection was enforced or not enforced on the ko-ri-dae-gum up ja’s side of the business.
I think this sort of private loaning business goes on around US Koreans as well. Of course, with high interest. Since, most of these people are involved in businesses like Korean Restaurant #133, competing with the dozens of same style of businesses inside a 10 mile radius. No bank would even consider lending money to them.
People should also think first, before they start these businesses. However, these 1st generation Korean mom and pop stores left deskjobs to run into something they weren’t even suited for to begin with.
My 2 cents.
not to say that labor must involve physically sitting down and spending 8 hours or so, but the gori guy I knew spent most of his time golfing, eating, drinking, and pretty much enjoyed a stay at home lifestyle, without the daily commute to work.
I guess I’m sure he spent plenty of time in his private meeting loan requesters, thinking about whether or not he should loan, etc. I guess.
Mohamed Yunus won a Nobel Prize for the work the Grameen Bank did in providing small high-interest loans to individuals. Grameen charged 20% interest, and never made a profit (its funds were continually topped up by governments and aid agencies). Most microcreditors charge between 30 and 70%. From the Asian Development Bank:
http://www.adb.org/Documents/B.....ealing.pdf
It IS a source of growth. It is also a fact that tapping that source of growth by way of providing finance to risk-seeking entrepreneurs involves accepting the expected high rates of default.
I cannot speak to the individual anecdotes above, but wouldn’t you agree that common sense would support the assumption that the 100%-plus rates are likely outliers, and not the norm? And that a broker who tried to make a business on such risky loans probably doesn’t have a very sustainable business model?
it probably is a source of growth. Afterall, it’s better for society that a business keeps its operations going rather than go bankrupt.
I can’t say if 100%+ rates are outliers, but I had the impression that it was the norm for gori’s.
I’m pretty sure bankruptcy is a crime in South Korea.
Mr. Yunus is an exceptional bright spot in a den of darkness. These sharks are not mere outlier in a sample population; plus 100% is common, I am told.
Also Linkd, do you actually think these guys keep a large portion their money in a bank here?
Besides that, they are just some more bums that go around putting stickers up in the neighborhood, helping to make the place look ugly, so maybe I should break *their* legs.
20% vs 100%+ interest is huge !
@linkd: there is a big difference from loaning $50 at 20% interest and $50,000 at 100+% interest. BTW, Grameen’s own website says:
“Grameencredit’s thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders’ rate.”
Why would the 100+% guys be outliers? How could they be? If you can get a loan at say 50%, why would you pass that up to get one at 100% interest?
As wjk notes, these guys are referred to as 고리대금업자. There are no 중리대금업자 or 박리대금업자. It’s either bank loans, credit card loans, or private (usurious) lenders.
That’s why I said: look at who’s doing this business. Of course they are getting paid. I do not have the patience to try to look up statistics on this, but it is not farfetched to imagine the following scenario:
Person takes out loan. Person makes several interest payments. Person falters on payments, but does not default entirely. Under threat of physical harm, person gets money from family members to repay loan or surrenders private property to lender.
@wjk: no, bankruptcy is not a criminal offense in Korea. It will of course, be harder to obtain credit post-bankruptcy.
And let me just say this about micro-credit.
What private lenders are doing in Korea is not micro-credit.
Micro-credit loans are granted to “sustainable” projects. They are going to people with business plans, however primitive, that are approved by the micro-credit lenders and often are monitored by them as well. The borrowers are not borrowing money to pay off other debts or for some emergency purpose.
This is not what is happening with private lenders in Korea. The money is not necessarily going to fund a business and the private lender has no interest in what it’s going for or how it will be used. The lender just wants to make money on the loan.
…(sigh)….