Briefing for '98: Koreans live on borrowed time

Kim Young Soo checks out visitors to his dingy two-room office through a peep-hole in the dirt-streaked metal door.

Customers don't mind the cluttered boxes, tattered couch and smoke-stained walls. They want Mr Soo's money and are willing to pay double bank rates to get it.

Mr Soo's clientele and thousands like them are driven to South Korea's illegal lending market when legitimate banks and finance companies are unwilling to lend or unable to lend quickly.

"The most desperate people turn to us. We are their last resort," Mr Soo said. "It's evil, but they need us."

Mr Soo works the so-called "curb" market, which lends an estimated 50,000bn won (pounds 19bn) a year - one sixth the size of the commercial bank market - to anyone who answers the ubiquitous advertisements in leading Korean newspapers.

In return, the lenders demand up to 60 per cent interest a year. The lenders demand collateral, and extortion and violence are an ever-present threat.

Many customers have no choice. And their numbers are swelling because the mounting financial crisis that forced South Korea to turn to the International Monetary Fund to sponsor a $60bn bail-out has paralysed many banks.

Nine of the country's biggest industrial groups collapsed this year, leaving banks and finance companies holding more than 50,000bn won of bad or suspect loans.

Now, creditors are unwilling to extend many loans since they are forced either to meet capital standards demanded by the IMF or to agree to be taken over or shut down.

Even some of Korea's biggest companies have been turning to the curb market, often with disastrous results.

When Chonggu Group, one of Korea's largest housing contractors, filed for bankruptcy protection at Christmas, it reported 1,000bn won (pounds 373m) in debt. In fact it had borrowed almost twice that amount. Unreported on the company's balance sheets, Chonggu said, was more than 1,000bn won in loans taken out this year from curb lenders.

"This is a dark side of the Korean economic miracle," said Dr John Young Lee, an economist at the Korea Institute of Finance in Seoul. "The curb market will almost kill business in Korea because of such high rates," said Sung Hee Jwa, president of the Korea Economic Research Institute.

Mr Soo says he provides financing for everything from a five-person business to Samsung Group, Korea's second-largest industrial group.

In many ways, the curb market reflects Korea's spectacular but lopsided economic growth.

When South Korea was trying to rebuild the economy after the Korean War, the former military rulers adopted the Japanese model of credit allocation.

The government nationalised banking in the early 1960s and funnelled resources into companies to develop targeted industries, such as shipbuilding, petrochemicals, automobiles and construction. These companies became the conglomerates that today dominate the country's economy.

Starved of funds, the small companies never had a chance to play a significant role in the country's economy. And the only real source of money for many of these companies was the curb market.

"This is a niche market, created by malfunction of the banking system," said Chung Young Hun, an economist at the Korea Institute of Public Finance.