Massive debt relief plan raises concerns over moral hazard

The government's plan to forgive 16.4 trillion won ($11.9 billion) in debt for 1.13 million long-term defaulters is drawing criticism from borrowers who have faithfully repaid their loans, industry officials said Friday.

"What does that say to self-employed people who paid off their debt by working late-night driving jobs or doing manual labor without sleep?" one commenter wrote in an online community for the self-employed. "It would be more appropriate to lower high interest rates or extend repayment periods instead."

Another commenter argued, "People should repay the money they borrowed themselves," adding, "They want to enjoy the rights but avoid the responsibilities."

Their frustration stems from the government's massive debt relief plan, announced Thursday.

The plan is a response to a growing number of individuals, especially the self-employed, who have been unable to repay their debts as the economic downturn persists. The plan will target unsecured loans of up to 50 million won that have been delinquent for more than seven years.

Borrowers who earn less than 60 percent of the median income and have no assets due to bankruptcy, debt rehabilitation or similar circumstances will have their debts fully written off. For those with assets but limited repayment capacity, up to 80 percent of the principal may be forgiven, with the remainder repayable over a 10-year period.

The government estimates the plan could result in the cancellation or restructuring of 16.4 trillion won in debt held by about 1.13 million people. Detailed payment methods, procedures and eligibility criteria will be announced by the third quarter at the latest.

The Financial Services Commission explained that resolving debt quickly and enabling individuals to return to normal economic activity is more effective in reducing social costs than allowing delinquency to persist through repeated loan extensions.

"The seven-year delinquency threshold is recognized as a long-term standard within the personal credit system," the regulator said. "It applies to defaulters who have endured extended periods of hardship, including asset seizures and debt collection efforts, and therefore cannot be considered short-term cases."

Still, the government is likely to face continued criticism over the perceived unfairness toward those who have diligently repaid their debts. Some warn that it may encourage borrowers to intentionally delay repayment in hopes of future forgiveness.

"There are concerns about moral hazard and disruption to financial market order," said Seo Ji-yong, a professor of business administration at Sangmyung University. "Rather than offering indiscriminate support, it is more important to help these individuals build self-sufficiency."

The government said it shares the public's concerns about the issue.

"We must avoid creating the impression that repaying debt puts one at a disadvantage. That’s why we’ve introduced a new program to support those who have been faithfully repaying their loans," said Vice Minister of Economy and Finance Lim Ki-keun in an interview with a local broadcaster Thursday.

Known as the "Diligent Repayment Support Program," the initiative will offer interest subsidies of 1 percentage point or preferential rates to 190,000 financially vulnerable small business owners who are consistently repaying policy loans.