More than 15% of borrowers whose delinquency records were erased under a government credit amnesty last year have fallen behind on payments again. Because governments elsewhere rarely set up separate funds to write off individual debts, analysts say financial companies should expand their own workout programs over the medium to long term.
The Lee Jae-myung administration has pursued aggressive debt relief measures in the financial sector during its first year and three months in office, according to financial industry sources on the 9th. On June 19 last year, just two weeks after taking office, the government created the New Leap Fund to write off the debts of long-term delinquent borrowers. In August of the same year, it announced a credit amnesty for low- and middle-income households and small business owners. The government judged that clearing the debts of long-term delinquents who cannot open bank accounts or obtain credit cards, and helping them return as normal taxpayers, brings greater benefit to the economy as a whole.
The programs have drawn hundreds of billions of won in contributions from the financial industry as well as public funds, but assessments of their effectiveness are mixed. An analysis of data from NICE Information Service and Korea Data Corporation (KODATA) by the office of Rep. Kim Sang-hoon of the People Power Party found that of 2.928 million individuals and sole proprietors who received credit recovery support last year, 483,000, or 16.5%, newly fell into delinquency during the first quarter of this year. That means one in six of those whose delinquency records were deleted in the fourth quarter of last year again failed to repay on time. Among the 2.572 million individuals granted credit amnesty, 456,000, or 17.7%, fell behind again, a higher rate of repeat delinquency than the 7.6% recorded for sole proprietors.
Analysts also note that it is hard to find cases in major advanced economies where a government directly raises a fund to write off or restructure the debts of individual borrowers. The administration of former U.S. President Joe Biden pushed a student loan forgiveness program, but that came against the backdrop of a major social issue, and policies that write off individual debts across the board, as the New Leap Fund does, are uncommon.
Korea's debt collection practices are admittedly unusually harsh, a legacy of the period after the 1997 foreign exchange crisis, when financial institutions handed collection work to consumer finance firms. Even so, given the side effects and questions of sustainability, analysts say it is preferable for financial companies to manage such cases themselves rather than have the government intervene directly. "In major economies, private-sector debt restructuring is well established, and while lenders may extend loan maturities, it is hard to find cases where the government writes the debt off," said Kang Sung-jin, a professor of economics at Korea University. "Considering the credit system, the current debt relief policy is not sustainable."
The National Assembly has voiced similar concerns. In a report on the operation of debt restructuring programs for financially vulnerable groups, published in late June, the National Assembly Budget Office said that "the more frequent special debt restructuring programs such as the New Start Fund and the New Leap Fund become, the more the mistaken perception can spread that the government will take care of debts even if they are not repaid." It added that "over the long term, financial companies need to strengthen preemptive management of delinquent loans and revitalize their own debt restructuring programs."
