Lee administration pushes for 'bad bank' to aid small businesses

President Lee Jae-myung attends an on-site meeting, aimed at eradicating unfair trading in the stock market, at the Korea Exchange in Seoul, Wednesday. Joint Press Corps

Discussions on establishing a "bad bank" to relieve debt burdens for vulnerable groups, including small business owners, are gaining momentum with the launch of the Lee Jae-myung administration, according to government officials and market experts Wednesday.

Financial authorities have already begun identifying the scale of long-term, small-scale delinquent loans. Additional details, such as the amount of debt to be acquired and the target beneficiaries, are expected to be outlined soon.

During his campaign, Lee repeatedly pledged to pursue debt relief and restructuring for small business owners hit hard by the COVID-19 pandemic.

"Substantial debt forgiveness, not just restructuring, is needed," Lee said in a televised debate during the presidential race.

At the time, he pointed out that while other countries had absorbed the cost of the pandemic through increased government spending, Korea's approach of offering loans only led to a heavier debt burden for its people.

Indeed, pandemic-related debt remains a significant burden for many small business owners.

Since 2020, the government and financial institutions have extended loan maturities and deferred repayments for those affected by the pandemic.

According to government data, loans worth approximately 47.4 trillion won ($34.6 billion) are set to mature by the end of September, with around 2.5 trillion won in principal and interest payments currently deferred.

A man walks past collateral loan advertisements posted outside a bank in Seoul, May 21. Yonhap

Against this backdrop, the new administration is actively considering the establishment of a specialized institution to acquire and manage bad loans, in line with the president's strong push for meaningful debt cancellation.

While serving as mayor of Seongnam City from 2010 to 2018, Lee founded Jubilee Bank, a nonprofit organization designed to provide debt relief for long-term overdue borrowers through a private-sector initiative.

That bank purchased nonperforming loans from the market at roughly 3 to 5 percent of their original value and allowed debtors to settle their debts by repaying only 7 percent of the principal, forgiving the remainder.

Funding came from donations of bad loans by financial firms, individual contributions and corporate sponsorships.

The financial authorities are currently exploring multiple options for managing a bad bank, including models similar to Jubilee Bank.

Government sources said the Lee administration is seriously considering establishing a dedicated unit under the Korea Asset Management Corp.

However, the challenge lies in securing funding, as the exact amount of bad loans to be acquired remains unclear.

The financial sector is already expressing concerns about the government's potential requests for cooperative financing.

"The government might request contributions from banks to support the creation of the bad bank, especially with media headlines emphasizing banks' record profits," an official from a major bank said.

An official from the Financial Services Commission stated, "Our current priority is to determine the scale of loans to be purchased. We are working to develop a practical approach."

At the same time, debates persist about the moral hazard posed by debtors, with some arguing that borrowers who have diligently repaid their debts may face unfair treatment.