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Personal debt relief pushed, forgiveness to be offered

Dec 22,2018
The government is going all out to ease the debt burdens on lower-income households as a part of its inclusive-finance policies, especially since the challenges faced by these households are expected to increase with the recent rise in the benchmark interest rate by the central bank.

On Friday, the Financial Services Commission (FSC) announced measures that will result in the forgiveness of debt of lower-income households if they demonstrate goodwill and continue to meet their obligations for a period of time. The FSC also said that various adjustments would be made so that people with heavy loan balances won’t be caught in a debt spiral as a result of falling credit scores.

According to the FSC, the government will push for the write down of the remaining balances for those who have borrowed less than 10 million won ($8,900) and have been unable to pay down their debt for a period of 10 years or more. This restructuring will be offered under the condition that the borrower continues to pay the loan for three years.

The FSC also announced plans to support those with very low credit scores - seven to 10 on a one-to-10 scale where 10 is the lowest - and on the verge of taking out loans from private lenders at higher interest rates.

Government financial institutions will be offering loans with interest rates set at around 10 percent - far lower than the rates charged by private lenders - and allow that interest rate to fall 1 and 2 percentage points every year if the borrowers are never late on their debt repayments. The government will offer roughly 1 trillion won of loans a year under this program.

Currently, about 62 percent of the people borrowing from government-owned financial institutions have low credit scores.

The government estimates that this program will likely benefit three million people who have reached their borrowing limits and are likely to head towards illegal financial companies charging very high rates.

The government will be changing the criteria for debt adjustment. Currently, only those more than 90 days late on their debt payments are eligible for debt adjustment. Debtors in this situation are already in trouble and face falling credit scores.

To prevent this from happening, the government will allow debtors to adjust their debts before payments are 90 days late.

To help those unable to repay their debts and help them quickly recover, the government will raise the amount that can be forgiven from the last year’s 29 percent to 45 percent by 2022.

“The inclusive finance that the government is strongly pursuing is not aimed at expanding the benevolent social contributions of financial institutions but to have the financial institution act properly,” the FSC Chairman Choi Jong-ku said. “The role of a financial institution is to allow the economic participants to pursue future opportunities while absorbing various risks.”

The FSC chairman said financial institutions fearing risk have been unable to play their role in the economy, and this has resulted in the increasing polarization of wealth and to an unstable macroeconomic environment.

“The individual workout or revitalization systems that were first adopted in the early 2000s have gradually made progress in protecting the debtors. A large amount of principal has been reduced, which wasn’t imaginable in the past,” Choi said.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]