Seoul: President Lee Jae Myung last week highlighted six critical sectors in Korea-regulation, finance, the public sector, pensions, education, and labor-as requiring immediate structural reforms. He emphasized that with signs of economic recovery starting to surface, the timing is ideal for implementing these changes. Although structural reform can be painful, it is essential for enhancing Korea's potential growth rate and advancing its economy.
According to Yonhap News Agency, concerns have emerged regarding President Lee's framing of the need for financial reform. He questioned whether the current financial system operates as a "financial caste system," where the poor are burdened with high-interest rates. However, the notion that low income and low creditworthiness overlap is not necessarily accurate. Credit ratings are determined by loan repayment consistency, not solely by income level. Data from Rep. Chun Ha-ram's office reveals that 6.74 million people in the top 30 percent income bracket have high credit scores of 840 or above. Notably, 2.02 million individuals in the bottom 30 percent income bracket also boast high credit scores, indicating that many low-income borrowers maintain strong credit histories through steady repayment.
Conversely, for borrowers with low credit scores of 664 or below, high-income borrowers surpass low-income borrowers by 430,000 to 340,000. The concept of a "financial caste system" that victimizes the poor with predatory rates does not align with these statistics. Treating low-income and low-credit borrowers as a single group could unfairly penalize low-income individuals who responsibly manage their credit.
In September, President Lee expressed that a 15.9 percent interest rate is "cruel" to ordinary citizens. However, he acknowledged that raising interest rates for high-credit borrowers to lower them for lower-credit borrowers would increase interest burdens on low-income yet high-credit borrowers. A plan intended to assist the vulnerable might inadvertently harm them.
Recent developments in the banking sector have seen a "rate reversal," with high-credit borrowers paying more than their low-credit counterparts. Banks have adjusted rates on policy lending products, focusing benefits on borrowers with credit scores below 600. Inclusive finance is vital for reducing income inequality and expanding opportunities for financially vulnerable citizens. Policy lending that alleviates interest burdens for low-income borrowers holds value.
Nevertheless, the government must aim to balance and minimize distortions in market interest rates. When political motives overly influence financial policy, Korea's meticulously constructed credit system risks being compromised. The administration should ensure that low-income borrowers who have consistently repaid their debts receive appropriate support through inclusive finance programs. Financial inclusion is crucial, but policies must be precise and not obscured by sweeping metaphors that misrepresent credit market realities.