'Haetsalron Bank' Launching in a Week... "Alleviating Burden on Common People vs Moral Hazard"

On the 26th, Following NongHyup, KDB, Jeonbuk, and Gyeongnam Banks, Sequential Seats to be Introduced Within the Year
"A Stepping Stone for Bank Transactions" vs "Moral Hazard and Increased Bank Burden"

[Asia Economy Reporter Kwangho Lee] Expectations and concerns are mixed as the launch of ‘Haetsalron Bank,’ involving 13 domestic banks, approaches in one week. There are rosy prospects that it will ease the burden on low-income people struggling due to COVID-19 and serve as a ‘stepping stone’ for banking transactions, but at the same time, negative views coexist that it could produce bad debts due to a surge in debtors unable to repay loans and create ‘sunflowers’ who only seek to enjoy the benefits.

According to the financial sector on the 19th, NH Nonghyup, IBK Industrial Bank, Jeonbuk Bank, and BNK Gyeongnam Bank will launch Haetsalron Bank in the first phase on the 26th. Other banks will sequentially release it within the year.

The support targets are low-income and low-credit groups who have used policy-based financial products for more than one year and whose debt and credit ratings have improved. It applies to those with an annual income of 35 million KRW or less, who fall within the bottom 20% of credit scores, and have an annual income of 45 million KRW or less. Loans are provided up to a maximum limit of 20 million KRW, differentiated according to credit and debt improvement. It supports living expenses without restrictions on specific purposes and offers a choice between a 3-year or 5-year principal and interest installment repayment plan (with a grace period of up to 1 year). The Korea Inclusive Finance Agency provides a 90% guarantee, and Haetsalron Bank users must pay an annual guarantee fee of 2%.

On the 1st, Financial Services Commission Chairman Eun Sung-soo said at the ‘Haetsalron Bank Business Agreement Ceremony,’ "Haetsalron Bank is a policy-based financial product designed to alleviate the financial difficulties of low-income and low-credit groups caused by the reduction of the maximum interest rate," adding, "Starting with the launch at the end of this month, we will operate a pilot period aiming to supply 300 billion KRW by the second half of this year."

Contrary to government expectations, experts have raised concerns. Since money can be borrowed from banks by merely going through formal paperwork, it may encourage moral hazard and cause relative deprivation among those who repay their debts diligently. In particular, the increased burden on banks when problems arise is also a concern.

Experts Concerned Over Rapid Increase in Subrogation Repayment Rate

In fact, due to the prolonged COVID-19 recession, the debt repayment ability of low-income people has declined, and the subrogation repayment rate of Haetsalron 17, supported by the government, is rapidly increasing. The subrogation repayment rate is the ratio at which the lending institution requests the guarantee institution, Korea Inclusive Finance Agency, to repay the debt on its behalf. Haetsalron 17 allows banks that provided loans to request subrogation repayment from the Korea Inclusive Finance Agency if there are four instances of delinquency. Last year, the subrogation repayment rate rose from 1.3% in June to 5.6% in December, an increase of 4.3 percentage points in six months. In other words, among 100 borrowers using Haetsalron 17, 6 failed to repay their loans, so the guarantee institution repaid on their behalf.

Experts generally express concerns about Haetsalron Bank. Professor Kim Sang-bong of Hansung University’s Department of Economics advised, "Due to the prolonged COVID-19 pandemic, the subrogation repayment rate of policy-based financial products is bound to rise," adding, "Financial authorities need to carefully manage to prevent and mitigate the rise in subrogation repayment rates."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics pointed out, "Even if government fiscal funds are injected to reduce interest burdens, it should not proceed as if it is separate from repayment feasibility," adding, "In such cases, it harms those who repay soundly and can become a burden on banks."

A bank official said, "The intention to improve and protect high loan interest rates for low-income and low-credit groups is good, but risks such as defaults are inevitable," adding, "The conditions are also strict, so how many low-income and low-credit people will benefit remains to be seen after the launch."

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