Deepening 'Corona Shadow'... Even Seominjeong Policy Loans 'Muktwi'? (Comprehensive)

Haepsalron17 Subrogation Rate
March 0.2% → September 3.4%

[Asia Economy Reporters Kim Hyo-jin and Kim Min-young] 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 closure, Jang was burdened with debts totaling around 200 million won borrowed from banks and secondary financial institutions. To make ends meet, he started working part-time. He even considered loan shark loans to secure immediate living expenses, but due to the enormous loan amounts and his plummeted credit rating, 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 won in support. However, soon after, the business where he worked part-time had to reduce staff, and after losing his job and moving between daily labor positions, Jang was unable to make even a single principal and interest repayment on the Hetsalron17 loan and 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 targeted at low-income earners are failing 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, rapidly increasing the amount the government must repay on their behalf.

According to the office of Hong Seong-guk, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, and financial authorities, the subrogation repayment rate of Hetsalron17, which was 0.2% in March, surged to 3.4% as of the end of September. The subrogation repayment rate refers to the ratio of the amount banks requested from KIFA for subrogation repayment out of the total loans. In the case of Hetsalron17, if delinquency continues up to the fourth installment, banks can request subrogation repayment from KIFA. So far, the government has repaid a total of 34 billion won on behalf of borrowers.

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

From KIFA’s perspective, which must manage the fund and products soundly, this trend is quite burdensome. 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. This is essentially a concern about moral hazard, where policy financial products for low-income earners are abused as a 'last loan.'

Illustration by Youngwoo Lee 20wo@

Accordingly, KIFA has proposed to the Financial Services Commission (FSC) to improve the system so that debt reduction through personal rehabilitation or personal workout is only possible after repaying the loan for a certain period for policy financial products targeting low-income earners. However, the FSC 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 debtors may have lacked repayment ability from the outset.

The FSC 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 the case of debt adjustment through the Credit Recovery Committee, creditor financial institutions can exercise veto rights, so if the debtor’s moral hazard is severe, they can respond by vetoing.

A financial industry official said, "Despite concerns from management institutions about defaults and the stance of financial authorities, both have valid points," adding, "Given the nature 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 multifaceted and diversified management measures."

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