The South Korean government and the ruling People Power Party (PPP) finally announced a fourth credit recovery scheme that deletes the overdue debt records of 2.9 million borrowers, both individual and small businesses, during the COVID-19 period. Eligible beneficiaries include those delinquents on loans no larger than 20 million won ($15,157) from September 2021 to January 2024 and who have repaid all the loans by the end of May 2024. Additionally, 370,000 borrowers delinquent on both financial loans and telephone bills can benefit from the government’s debt restructuring program.

The bold action makes sense in large part as it gives a ‘second chance’ to credit-challenging borrowers. The financial laws limit borrowers’ access to credit services, such as applying for credit cards or borrowing new money, if they have overdue debt records. In loan issuance, borrowers with overdue debt records are less likely to be offered favorable terms and conditions from creditors, which forces vulnerable borrowers to rely on private lenders that charge higher interest rates.

But the measure might raise concerns about the potential risk of moral hazards in loan delinquency among borrowers, which can ultimately threaten the financial market.

The scheme itself is not something new. The first one was implemented during the financial crisis of January 2000, followed by two additional programs in 2001 and 2021 respectively.

These debt relief measures could endanger the financial system in which credit matters the most and risk misleading borrowers into thinking that overdue debt records are an easy thing to delete. Deleting information on past overdue debt could make it harder, if not impossible, for major lenders and other financial institutions to distinguish reliable borrowers from riskier ones and some critics have already accused the latest scheme of a being populist policy.

Support for the self-employed and everyday individuals grappling with soaring prices and rates is imperative, particularly amid high inflation and interest rates. But despite its intention, the government should take a more cautious stance on any risks of such quick-fix solutions and instead focus on strategies aimed at increasing the overall incomes of the self-employed population.

By Editorial Team

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