Financial Services Commission's Measures to Prevent 'Moral Hazard' in New Start Fund Revealed

[Asia Economy Reporter Song Hwajeong] The government has actively taken measures to prevent moral hazard controversies ahead of the final announcement of the New Start Fund. While strictly limiting the principal reduction beneficiaries, it has also established mechanisms to prevent moral hazard, such as invalidating debt adjustments if hidden assets are discovered.

According to the financial sector on the 19th, the Financial Services Commission held a briefing session for the financial sector the day before and announced detailed operational plans for the New Start Fund. In particular, this briefing focused on measures to block the moral hazard controversy that has consistently followed the announcement of the New Start Fund.

The FSC acknowledged that excessive debt adjustments could cause moral hazard and strengthened the requirements to prevent this. First, the principal reduction beneficiaries and eligible debts will be strictly limited. Debt adjustments will only support self-employed individuals and small business owners affected by COVID-19. Real estate rental and sales businesses, gambling machine manufacturing, and professional occupations are excluded. Eligible debts include business loans and household loans held by the supported borrowers. Since individual business owners often borrow business funds through household loans and repay business loan defaults with personal loans, household loans are also included. Support is limited to loans affected by COVID-19, and loans for asset formation purposes such as home purchases are naturally excluded. Kwon Daeyoung, Director of the Financial Policy Bureau at the FSC, explained, "A characteristic of individual business owners is that those with good credit scores tend to take out many business loans, but if there is delinquency, they have many personal loans. If only business loans are supported, defaults will inevitably occur in personal loans, so comprehensive support was considered."

Principal reduction applies only to credit debts of delinquent borrowers overdue by 90 days or more, and only 60-80% of net debt is reduced if liabilities exceed assets. Secured loans are excluded from principal reduction. For borrowers at risk of default with less than 90 days overdue, debt adjustments such as grace periods, long-term installment repayment support, and interest rate adjustments on high-interest debts are provided.

The FSC will conduct strict asset and income assessments linked with the National Tax Service for eligible individuals, and if hidden assets are discovered through periodic asset investigations, debt adjustments will be invalidated. They plan to thoroughly check for hidden assets using the credit recovery committee and Korea Asset Management Corporation’s network with the National Tax Service.

Additionally, to prevent intentional delinquency, the use of debt adjustment will be registered for two years and reflected in credit evaluations for 1 to 5 years.

Detailed criteria for borrowers at risk of default will not be publicly disclosed. If detailed criteria such as the bottom percentage of credit scores or the number of overdue days were disclosed, debtors could apply for the New Start Fund according to those criteria, so this is blocked in advance.

Director Kwon said, "Excessive debt adjustment can cause problems such as the deterioration of credit order and moral hazard, but appropriate debt adjustment benefits borrowers, creditor financial institutions, and the national economy. It increases the borrower's repayment ability through proactive debt adjustment, cleans up financial institution insolvencies, improves recovery rates, and provides opportunities to return to economic activities, thereby strengthening the economic foundation and reducing social welfare costs."

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