Government-Backed but Runaway Debts?... 'Haetsallon17' Users Face Surge in Bankruptcy and Debt Adjustment Cases

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Increase in Bankruptcy and Debt Adjustment Applications Among Lowest Credit Borrowers Due to Recession Impact

Government Subrogation Repayment Rate Rises from 0.2% in March to 3.4% in September

[Asia Economy Reporters Hyojin Kim and Minyoung Kim] Jang Chung-seon (56, pseudonym), a self-employed individual, was forced to close his store last June due to the aftermath of the novel coronavirus disease (COVID-19) and other factors. Upon closing his business, Jang was burdened with debt amounting to 200 million KRW borrowed from banks and secondary financial institutions. To make ends meet, he started working part-time. He even considered loan options from private lenders to secure immediate living expenses, but due to the enormous loan amounts and his plummeting credit score, borrowing money was difficult.

About to resort to illegal private loans, Jang heard from an acquaintance that he could apply for the "Hetsalron17" loan, a guaranteed product from the Korea Inclusive Finance Agency (KIFA). In urgent need, he received 7 million KRW. However, soon after, the business where he worked part-time had to reduce its workforce, and after losing his job, Jang drifted through daily labor jobs. Unable to make even a single principal and interest repayment on the Hetsalron17 loan, he applied for a personal workout through the Credit Recovery Committee.

Due to the structural recession deepened by COVID-19, many people who used policy financial products aimed at low-income earners are unable to repay properly and are entering bankruptcy or debt adjustment procedures. In particular, the delinquency rate of Hetsalron17, used by the lowest credit borrowers, has surged, causing the amount the government must repay on their behalf to increase rapidly.

According to the office of Hong Seong-guk, a member of the National Assembly's Political Affairs Committee from the Democratic Party, and financial authorities, the subrogation repayment rate of Hetsalron17, which was 0.2% in March, surged to 3.4% by the end of September. The subrogation repayment rate refers to the ratio of the amount the bank requests KIFA to repay on its behalf out of the total loans. For Hetsalron17, if a borrower is delinquent up to the fourth installment, the bank can request subrogation repayment from KIFA. So far, the government has repaid a total of 34 billion KRW on behalf of borrowers.

Hetsalron17 is an alternative product 100% guaranteed by the National Happiness Fund to include low-credit borrowers, who otherwise have no choice but to use high-interest loans from private lenders or illegal private financiers, into the formal financial system. Those with an annual income of 35 million KRW or less, or 45 million KRW or less with a credit rating between 6 and 10, can receive up to 14 million KRW at a fixed high interest rate of 17.9% per annum.

From KIFA’s perspective, which must manage the fund and products soundly, this trend is a considerable burden. They especially worry about cases like Jang’s, where borrowers do not even make the first principal and interest payment and rely on debt adjustment procedures. They are cautious about moral hazard, where policy financial products for low-income earners are abused as a ‘last loan’ option.

Illustration by Youngwoo Lee 20wo@

Hetsalron17 Delinquency Rate Surges, Government’s Subrogation Repayment Rate Also Jumps

Accordingly, KIFA has requested the Financial Services Commission to improve the system so that debt reduction through personal rehabilitation or personal workout is only possible after a certain period of loan repayment for policy financial products aimed at low-income earners. However, the Financial Services Commission rejected this, stating that it is unreasonable to consider failure to repay even once as moral hazard. They explained that repayment may be impossible due to unavoidable deterioration in repayment ability immediately after the loan, and some borrowers may have lacked repayment ability from the start.

The Financial Services Commission also stated, “If non-payment due to moral hazard is confirmed, the creditor’s recovery rights are fully guaranteed regardless of whether the debtor applies for the Credit Recovery Committee.” Furthermore, in cases of debt adjustment through the Credit Recovery Committee, creditor financial institutions can exercise veto rights, so they can respond with veto if the debtor’s moral hazard is severe.

A financial industry official said, “Both the concerns of the management institutions about defaults and the stance of financial authorities have merit,” adding, “Given the characteristics of the low-income financial market, some level of default must be borne. We need to first overcome the wave of COVID-19 and then prepare more multidimensional and diversified management measures.”

This content was produced with the assistance of AI translation services.