A debt rescheduling fund will be launched later this month as part of efforts by the new administration to tackle the household debt problem.
Previous governments had carried out similar projects to help households stricken with heavy debt obligations but the planned program, one of President Park Geun-hye’s key campaign pledges, is the most far-reaching and comprehensive. Given this, the plan could be a double-edged sword, depending on how it is run.
A blueprint unveiled by the Financial Services Commission shows that the “People’s Happiness Fund’’ will initially use 870 billion won ($783 million) from the credit recovery fund of the Korea Asset Management Corp. (KAMCO). The size of the fund could swell to 18 trillion won in accordance with KAMCO’s issuance of bonds and dispose of up to 22 trillion won in soured loans.
The fund will buy debts owned by banks and other financial firms that have been in arrears for more than six months as of the end of February. As a result, people with total debts of less than 100 million won who failed to pay the interest on their loans before last August will be eligible to apply for the fund, a move aimed at defusing moral hazard among borrowers. The number of such households is estimated to be 1.12 million but less than that are expected to apply for the scheme.
Commercial banks, insurance companies, credit card firms, savings banks and even private money lenders are able to sign an agreement with the fund to take part in the program. The participating financial firms are required to sell their soured assets at highly discounted prices ― 4-8 percent of the bad loans’ nominal value.
The fund will write off up to 70 percent of debts owed by low-income households and 50 percent by middle-income homes. Borrowers will also be allowed to service the remaining debt over a long period.
Household debt reached 959 trillion won as of the end of last year, nearly 80 percent of the nation’s GDP in 2011. Given the severity of that amid the prolonged economic slump, the debt relief program may be necessary. However, it could also be a populist measure as some skeptics argue there are already several programs to help heavily indebted borrowers.
What’s most disturbing is the moral hazard problem both on the part of financial firms and borrowers. There is also the risk of reverse discrimination against those who have serviced their debts faithfully or impoverished families who couldn’t even afford to borrow money.
This is why the government needs to design and implement this rescue program more elaborately. This necessity is all the more so, considering that the plan is actually a litmus test to gauge the success of Park’s subsequent welfare programs. What’s needed most is to convince people this will be the last debt relief scheme.