[Initial Perspective] There Should Be No Innocent Victims in 'Credit Amnesty'

[Asia Economy Reporter Kwangho Lee] Early next month, low-income individuals trapped in debt due to COVID-19 will receive a government "credit pardon."

Those who have overdue loans of 20 million won or less from January last year to the 31st of this month, but faithfully repay the full amount by December 31 of this year, including individuals and sole proprietors, are eligible.

The financial sector will not share overdue history information nor reflect it in credit evaluations by credit rating agencies. The number of beneficiaries is estimated to be about 2.3 million.

This support follows President Moon Jae-in's directive at the July Ministerial Meeting on the People's Economy to support credit recovery for low-income people.

At that time, President Moon said, "It is important to expand policy finance for citizens with low credit ratings and low income. Please promptly prepare credit recovery measures for those who inevitably cannot repay their debts on time," directing the expansion of policy finance for the underprivileged.

In response, former Financial Services Commission Chairman Eun Sung-soo held meetings with 20 institutions, including related associations and central organizations across the financial industry, the Korea Credit Information Services, and six credit information companies, to discuss and finalize specific plans for credit recovery support programs.

At the appointment ceremony of Financial Services Commission Chairman Ko Seung-beom on the 31st of last month, President Moon also urged, "Please thoroughly prepare so that more than 2 million eligible overdue borrowers due to COVID-19 receive benefits without omission."

Chairman Ko responded, "I will fulfill my duties, including stabilizing the financial market." After meeting with financial holding company chairpersons on the 10th, he told reporters, "The credit pardon will begin as scheduled in October," with the second week, the 12th, being the most likely date.

In the special circumstances of COVID-19, temporary cash flow difficulties causing overdue payments are inevitable. It is a natural obligation for financial authorities to prepare relief measures.

However, while credit recovery support and rehabilitation measures are welcome, undermining credit principles and expanding financial support damages the essence of the financial industry.

It is only natural that those who faithfully repay their debts on time receive higher credit ratings. However, individuals and sole proprietors targeted by this measure should have lower scores due to overdue history, but since this will not be reflected, their credit scores are expected to actually increase.

The financial sector expects that about 2 million people’s credit scores (based on NICE) will rise by 34 points, from an average of 670 to 704. As a result, 120,000 people are expected to meet the minimum credit score requirement for credit card issuance (NICE 680) after credit recovery support and thus be able to obtain credit cards. Additionally, 130,000 people are estimated to exceed the average credit score of new bank loan borrowers (NICE 866), potentially increasing their loan limits or receiving benefits such as lower loan interest rates.

Finance is credit. Discrimination based on the degree of creditworthiness is necessary, and if this principle collapses, trust in the entire financial sector is shaken.

Moreover, this type of support method could lead to moral hazard, as seen in past credit recovery supports during the International Monetary Fund (IMF) foreign exchange crisis or debt relief cases under the Park Geun-hye administration, where "if you endure, your debt will be forgiven."

Repeating financial support without principles cannot avoid criticism as "political finance." This is especially true in the run-up to the presidential election. It is hoped that those borrowers who have consistently repaid bank debts despite declining sales, those who have cashed in insurance to repay loan interest, and those who have borrowed to repay debts?borrowers who have maintained their creditworthiness by faithfully repaying loan interest under adverse conditions?do not feel discriminated against.

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