The South Korean government will extend debt relief under the New Leap Fund to borrowers who fell back into delinquency after failing to complete workout programs or personal rehabilitation proceedings. The move effectively grants a second round of debt forgiveness, prompting concerns in the market about moral hazard.
The Financial Services Commission and the Korea Asset Management Corporation have decided to write off small, long-overdue debts of seven years or more through the New Leap Fund even if the borrower has a history of debt restructuring in the interim, according to financial industry sources on the 9th. To carry this out, the agencies plan to revise next month an agreement signed by financial companies and related institutions.
Launched in October last year, the New Leap Fund forgives unsecured loans of 50 million won or less extended to individuals and sole proprietors that have been delinquent for seven years or more, meaning the delinquency occurred before June 19, 2018. Borrowers with no capacity to repay have their debts written off in full, while those with some ability to pay have 80% of the principal erased and repay the remainder in installments over 10 years.
The issue lies with borrowers holding loans overdue for more than seven years who entered debt restructuring programs but did not see them through. Until now, when borrowers who had obtained debt reductions through the Credit Counseling and Recovery Service or the courts fell into arrears again, the delinquency period was recalculated from the date the restructuring agreement lapsed rather than from the original date of default. Although their first delinquency dated back more than seven years, the restructuring had the effect of shortening the measured delinquency period. As a result, they were excluded from the New Leap Fund.
The government now intends to use the date of first delinquency as the reference point for borrowers who went through debt restructuring. Officials and outside observers estimate that between 500 billion won and 1 trillion won in debt, measured by outstanding balance, would newly become eligible for purchase. "There have been cases where borrowers met the seven-year threshold based on the date of first delinquency but were excluded from support because they had a history of debt restructuring, and we are seeking to change the system," a government official said. Cho Dong-keun, professor emeritus of economics at Myongji University, said, "The idea that the state will take responsibility for them could spread among debtors."
