With the local financial authorities planning to alleviate the debt repayment burden of vulnerable borrowers, local banks are facing risks and regulations that might compromise their autonomy and cause moral hazard.
The South Korean government is going to implement debt restructuring for vulnerable borrowers within this year along with a delayed forfeiture of benefit of time.
The government plans to alleviate the burden of principal and interest repayment in the debt settlement process in the banking sector. Specifically, the ratio of principal repayment exemption is likely to be adjusted from 30% to 45%.
Although this is expected to be limited to vulnerable borrowers whose incomes are much lower than the principal of their loans, equity- and moral hazard-related problems are likely to be inevitable in the presence of those repaying their debts without exemption.
“The system itself is well-intended indeed, but who will repay his or her debt as scheduled with another person enjoying debt deduction starting from the second or third month of default?” said a local bank, adding, “Banks might refuse to provide loans for vulnerable customers.”
The Financial Supervisory Service recently responded to the criticism by saying that every detail is yet to be determined although it is discussing the matter with local banks. Still, with the planned introduction of debt restructuring already made public, even borrowers capable of repaying their debts are already delaying repayment one after another.
Also, the government is planning to employ a third agency for the purpose of private debt restructuring mediation for vulnerable borrowers. The idea is to allow the agency similar to private credit counseling agencies in the U.S. and Britain and France’s public agency serving the same purpose to negotiate with creditors on behalf of borrowers. However, banks are claiming that the time is not ripe yet for that system in the financial infrastructure of South Korea.
At the same time, the government is going to set up new rules regarding bank branch closure, saying that more closed branches can mean less access to banking services on vulnerable people’s part. Banks are opposed to the rules, claiming that restrictions on bank branch closure will infringe upon their autonomy with online banking becoming more and more popularized.
In addition, the government is trying to encourage banks to adopt more interest-limited mortgage loans so that borrowers’ interest burden can be reduced during a period of rising interest rates, yet banks are hesitating to do so as the measure already failed once.
Furthermore, banks are expressing concerns over the government’s plan to help enterprises with lower credit ratings take out loans by shifting the focus of pre-loan qualification from collaterals toward business outlooks, credit ratings, industry reputations and employers’ morality.