Some South Korean public institutions reject individual debt restructuring proposals at rates up to about five times higher than private financial firms, according to data released on the 29th.
Data submitted by the Credit Counseling and Recovery Service to Rep. Shin Dong-wook of the People Power Party, a member of the National Assembly's National Policy Committee, showed that the Korea Credit Guarantee Fund and the Korea Student Aid Foundation posted first-round rejection rates of 5.9% and 4.8%, respectively, for debt restructuring cases from January through August this year. Debt restructuring through the service is finalized once a majority of creditor financial institutions consent. The first-round rejection rate is the indicator that most accurately reflects an institution's willingness to accept restructuring.
Over the same period, the rejection rate for the banking sector was just 1.4%. Savings banks and specialized credit finance companies recorded 1.1% and 1.8%, respectively. The gap has fueled criticism that while the government stresses support for vulnerable borrowers to get back on their feet, some institutions are in fact less accommodating than private lenders.
Posts on an online community run by the service describe difficulties caused by rejections from public institutions. One borrower in their 20s, who said they had fallen behind on 1.3 million won in student loans, wrote that after a court payment order arrived in August, they asked the student aid foundation to withdraw the order so they could apply for a revised restructuring plan — a process that adds new debts to an ongoing restructuring arrangement. The borrower said the foundation replied that this was out of the question and that it would refuse to consent to the revised plan if an objection was filed. The foundation said it had explained the grounds because the case fell under its criteria for refusal, adding that immediately lifting legal measures would result in financial losses.
The credit guarantee fund and the student aid foundation say they have set up and operate exception criteria that take into account moral hazard and the expected value of recovering the debt. Other public institutions and banks, however, accept restructuring proposals without separate exception rules, in line with the purpose of the agreement governing the process. Article 10 of the Credit Recovery Support Agreement states that creditors should make efforts to consent unless the proposal's reasonableness is not recognized or there are grounds to believe it would significantly limit the prospects of recovery. The Korea Inclusive Finance Agency, Industrial Bank of Korea, the Korea Workers' Compensation & Welfare Service and the Small Enterprise and Market Service all posted rejection rates of 0% this year.
"The government emphasizes helping financially vulnerable groups recover, yet some public institutions are less willing than private firms to agree to debt restructuring," Shin said. "Before pressuring private financial companies, the government should first fix the rigid debt restructuring standards and practices at public institutions."
