[Political Finance Runaway] Full-Scale Push for 'Bank Debt Relief Act'... "Unique in the World"

National Assembly Political Affairs Committee Presents Banking Act Amendment Bill... Shifting Burden to Financial Companies

Yoon Kwan-seok, Chairman of the National Assembly's Political Affairs Committee, is presiding over the full meeting of the Political Affairs Committee on the 22nd. Photo by Yoon Dong-ju doso7@

[Asia Economy reporters Kwangho Lee and Giho Sung] A globally unprecedented bill is being promoted that would effectively obligate financial institutions to forgive debts when the income of self-employed individuals and office workers decreases due to disasters. Although the government, financial sector, and the National Assembly’s expert committee that provides bill review guidelines have expressed opposition, the ruling party is pushing the bill forward with its majority seats. While this is seen as a tactic to regain public favor after the crushing defeat in the April 7 by-elections, critics warn that such populist demands could backfire in the next presidential election.

On the 22nd, the National Assembly’s Political Affairs Committee held a plenary meeting and presented the “Partial Amendment to the Bank Act” and the “Partial Amendment to the Act on the Protection of Financial Consumers,” both proposed by Min Hyung-bae, a member of the Democratic Party of Korea who previously served as the Social Policy Secretary at the Blue House under the current administration.

The amendments allow business operators who have received orders to restrict operations or close business premises, or whose income has significantly decreased due to rapid economic changes, to apply to banks for principal reduction or deferment of principal and interest repayments on loans. Banks are required to consider the applicant’s income reduction scale and take related measures. This creates a mandatory regulation that if self-employed income sharply declines during a crisis, they can request debt forgiveness from banks, which must then take appropriate action. The Financial Services Commission will have the authority to order loan reductions or defer insurance premium payments.

The lawmakers who proposed the amendments stated the reason as “preventing an increase in unemployed persons due to business owner bankruptcies and worsening wealth inequality.” However, there is strong criticism that forcing private listed financial companies to share losses instead of responding with fiscal measures during disasters disrupts market order. Concerns have also been raised about moral hazard, where many people might demand loan principal reductions even with slight economic downturns, and that it could raise the borrowing threshold for vulnerable groups.

There is no precedent anywhere overseas for forgiving loan principal. Only countries like the United States, Spain, and Italy have legislated deferrals of principal and interest repayments, mostly through social consensus mechanisms.

A government official expressed opposition, saying, “Mandating banks to reduce loan principal infringes on the property rights of private banks and could undermine bank soundness.”

This bill is scheduled to go through the Political Affairs Committee plenary meeting on the day, the Legislation and Judiciary Committee on the 28th, and then be submitted to the plenary session on the 29th.

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