Transition Team Unveils 'Bad Bank' Card: "Don't Repay Debt, Government Will Assist"

Signs of Moral Hazard Among Small Business Owners Due to Principal and Interest Relief Benefits

[Asia Economy Reporter Donghyun Choi] "From now on, try not to repay your debts and just hold on." "Only the self-employed who have worked hard to repay their debts have become fools."

These are the reactions pouring out among small business owners after the next government pulled out the ‘bad bank’ card to solve the debt problems of small business owners affected by COVID-19. Since those selected as bad bank beneficiaries can receive benefits such as principal and interest forgiveness and interest reduction, a ‘moral hazard’ phenomenon is already emerging where people are reluctant to repay their debts. Small business owners who have diligently repaid their debts are feeling disheartened, calling the system unfair.

A bad bank is an institution that purchases and professionally manages non-performing assets and bonds. When banks sell non-performing loans such as small business loans to a bad bank, the bad bank readjusts the debt according to the debtor’s situation to support a smooth landing. Ahn Cheol-soo, the chairman of the presidential transition committee, recently proposed establishing a bad bank jointly funded by the Small Enterprise and Market Service, the government, and banks, accelerating its introduction. Currently, the transition committee and financial authorities are conducting close discussions on the scale of investment and support methods.

As the establishment of the bad bank becomes a foregone conclusion, debates are heating up in various communities where small business owners and self-employed individuals are active. One small business owner urged, "Get high-interest loans quickly and then switch to the low-interest bad bank later," encouraging the loophole of refinancing. Another small business owner shared past experiences with bad banks, saying, "I just refused to pay, and eventually the government helped," recommending intentional delinquency. Many self-employed people who have been reducing their debts despite the difficult conditions of COVID-19 raised their voices, saying the government is trying to repay personal debts again with taxpayers’ money. One small business owner lamented, "I feel pathetic for myself, who has been holding on by working two or even three jobs trying to repay debts no matter what." Another self-employed person said, "I even used debt to pay for my child's college tuition," expressing, "I feel so sorry for my child, whom I advised to take a leave of absence and enlist in the military."

In the past, successive governments have occasionally used bad banks during various financial crises such as the International Monetary Fund (IMF) foreign exchange crisis and the credit card crisis. Most recently, during the Park Geun-hye administration in 2013, a bad bank called the ‘National Happiness Fund’ was created, which reduced debts by up to half for 330,000 delinquent borrowers who failed to repay unsecured loans under 100 million won for more than six months. At that time, various controversies arose regarding moral hazard, reverse discrimination, and the selection criteria for beneficiaries.

This time, concerns are raised that side effects may be greater because it is the first bad bank established specifically for a particular group, ‘small business owners,’ along with the special circumstances of COVID-19. It is difficult to individually verify COVID-19 damage, and even among debtors, non-small business owners may be excluded from government relief. Lee Jeong-hwan, senior researcher at the Korea Institute of Startup & Entrepreneurship Development, emphasized, "Since it is difficult to filter out COVID-19 damage, debt forgiveness criteria should be well designed based on reality rather than theory," adding, "The key will be how to properly adjust debts to induce realistic repayment and enable recovery, rather than simply reducing debts indiscriminately."

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