The South Korean government has moved to clear up to 6 trillion won ($4.3 billion) in overdue loans owed by small business owners hurt by the COVID-19 pandemic, acting on concerns that the interest burden on vulnerable borrowers could become a trigger point for the economy during a period of rising rates. But with the New Leap Fund, which clears loans overdue by seven years or more, less than a year old, another round of government-led debt forgiveness has drawn considerable criticism over moral hazard and fairness.
Deputy Prime Minister and Finance Minister Koo Yun-cheol said on the 28th that the government would aggressively restructure loans owed by small business owners that have been overdue for more than three years because of pandemic damage. He spoke at a meeting of the emergency economic headquarters, held jointly with a meeting of economy-related ministers, at the Government Complex Seoul.
Loans extended to sole proprietors between 2020 and 2023, when the pandemic was at its peak, totaled about 359 trillion won, of which roughly 155 trillion won, or 43%, remains unpaid. Loans more than three months overdue stand at about 6.3 trillion won. The government plans to aggressively restructure loans that fell into arrears before June 2023 and remain overdue. It will finalize the specific eligibility criteria and the methods of write-off and restructuring in step with budget deliberations in the National Assembly. Given that the government intends to restructure debt as aggressively as possible, analysts estimate the scale will come to somewhere around 5 trillion to 6 trillion won.
Explaining the large-scale forgiveness, the government said it was "intended to give a chance at recovery to those who sacrificed their livelihoods for the community," adding that "based on our experience operating the New Start Fund, cases of borrowers deliberately withholding repayment and then receiving reductions were negligible." The aim is to help small business owners who took a heavy hit to their businesses from pandemic containment measures get back on their feet despite their debt burdens.
Delinquency rates on sole proprietor loans in the financial sector have indeed risen steadily as sales declines and deteriorating cash positions persisted after the pandemic, reaching 1.2% at the end of 2023, 1.81% at the end of 2025 and 2.05% at the end of March this year. Concerns over the soundness of the financial sector are expected to grow further, particularly after the Bank of Korea raised its policy rate for a second consecutive month starting last month. The government's plan is to clear the debts of vulnerable borrowers and support their return to economic activity before bad loans spread through the financial sector.
But there is also strong concern about repeated debt forgiveness. The government has announced another debt restructuring program, this time widening eligibility to loans overdue by three years or more, just 10 months after the New Leap Fund, targeting loans overdue by seven years or more, was launched last October. Through the New Leap Fund, debts owed by 1.13 million people have already been slated for forgiveness. Critics say it is hard to find cases abroad of a government periodically creating funds to write off individual borrowers' debts.
Yang Joon-mo, a professor of economics at Yonsei University, said, "A debt forgiveness policy without a fundamental plan such as reviving domestic demand is a stopgap measure," adding, "Shaking the principle of a credit society, in which repaying faithfully earns you the chance to run a bigger business, can bring serious problems to the way the economy is run."
State-run financial institutions will also write off long-overdue loans of 20 years or more in bulk in the second half of this year. The Export-Import Bank of Korea will write off 16.2 billion won in long-unpaid special claims on small and medium-sized enterprises for the first time, and plans to extinguish the debts of joint surety guarantors, including chief executives, along with them.
Some have also raised the issue of fairness toward borrowers who have kept up their repayments. In response, the government plans to strengthen incentives for such borrowers to minimize fairness concerns. The Korea Credit Guarantee Fund will widen the guarantee fee discount on its step-up special guarantee for small business owners who repay faithfully under difficult conditions from 0.3% to 0.4%, while the Export-Import Bank of Korea will reduce interest for companies undergoing restructuring that repay without falling into arrears. The Small Enterprise and Market Service plans to offer a 0.3 percentage point preferential rate and raise lending limits by 200 million won.
The Bank of Korea will overhaul its 30 trillion won bank intermediated lending support facility to expand support for small and medium-sized enterprises in provincial areas. The Export-Import Bank of Korea will launch fast-track special loans worth 50 billion won and technology special loans worth 100 billion won next month, offering rates comparable to those for blue-chip smaller companies, and will also pursue a plan to pay guarantee fees on behalf of borrowers to the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation, up to 1.5% a year.
Supply of policy finance products for borrowers with mid- to low-tier credit will also increase sharply. Sunshine Loan, a policy finance product for low-income borrowers, will be supplied at 6.2 trillion won next year, 300 billion won more than this year. The lending limit for Smile Microcredit loans to young adults will be doubled to 10 million won from the current 5 million won. The government plans to meet young adults' funding needs by adding borrowers with annual income of 35 million won or less who rank in the bottom 50% by credit score to those eligible for Smile Microcredit for young adults. To reduce the burden from rate swings during a period of rising rates, it will also encourage banks to launch purely fixed-rate mortgage products with terms of 10 years or more. An official in the financial industry said, "Even though we have entered a period of rising rates, repeated debt forgiveness and expanded supply of policy finance products for low-income borrowers are not a fundamental solution to the problem."
