Korean gov’t writes off debts of 850,000 individuals; These programs are quite controversial because they can mislead the public ― people may think they don’t have to repay their debts because the government will take them over after all

2013-12-25 18:04

Gov’t writes off debts of 850,000

By Na Jeong-ju
As many as 850,000 individuals have benefitted from multiple debt-relief programs initiated by the Park Geun-hye administration this year, according to data unveiled Wednesday.The number of beneficiaries may increase further next year to reach one million because the government is adamant about helping debt-ridden individuals, which was one of Park’s election campaign pledges, critics say.
These programs are quite controversial because they can mislead the public ― people may think they don’t have to repay their debts because the government will take them over after all.
The government spent hundreds of millions of dollars of taxpayers’ money on writing off individual debts through diverse organizations, including the Financial Services Commission, the Financial Supervisory Service, the Korea Asset Management Corp. the Korea Housing Finance Corp. and the Credit Counseling & Recovery Service.
Next year, the Korea Student Aid Foundation will join them to buy debts of borrowers of its student loans.
The so-called People’s Happiness Fund, which was launched in March weeks after Park’s inauguration, is most popular among debtors, the data showed.
As of the end of November, a total of 264,362 people applied for the debt write-off program, and about 90 percent of them actually benefited from this program. The government plans to choose an additional 10,000 beneficiaries by Dec. 31.
The fund, which is worth 18 trillion won ($17 billion), is similar to bailout money offered to cash-strapped companies during economic hard times. Using the fund, the government writes off part of individual debts, and reschedules the remainder.
The government also introduced various programs to help indebted homeowners and low-income households. For example, it bought houses from debtors who couldn’t sell them due to sluggish housing demand.
It even deleted credit delinquency records for more than 100,000 people so that they could borrow from banks and get credit cards.
The problem is that, despite these measures, the quality of debts held by individuals keeps worsening.
The number of credit delinquents who applied for the government’s credit recovery programs reached 96,412 as of the end of November, surpassing last year’s 90,368.
Concerns have been growing over the side-effects of the debt write-off programs.
Critics say an increasing number of debtors tend to take it for granted that the government will resolve their debts even if they don’t repay. The programs are also discriminatory against ordinary citizens.
“The government needs to tackle such a moral hazard problem in implementing the services. There should be strict standards in sorting out those who are capable of repaying debts,” one banker said.

2013-12-27 17:53

Risk of moral hazard

About 850,000 debtors have benefitted from the government’s various debt-relief programs. The figure was the largest ever and far more than what financial authorities had expected. This may be proof that ordinary people are enduring the prolonged economic slump.
Under the People’s Happiness Fund, initiated in April to fulfill one of President Park Geun-hye’s election promises, 264,362 people applied for its debt write-off scheme, and about 90 percent of them benefitted from the program through the end of November. The Financial Services Commission expects 10,000 more beneficiaries by Dec. 31.
As many as 400,000 low-income households benefitted from debt rescheduling programs, and 53,000 others saw their high-interest loans converted into low-interest ones. Banks even supported 20,000 indebted “house poor’’ who couldn’t sell their houses due to the depressed real estate market.
The financial regulator expects the number of beneficiaries to reach 930,000 next year and surpass 1 million in 2015. The rescue programs carry great significance in that they help relieve the plight of the working class with heavy overdue loans and enable them to stand on their own feet.
In fact, the nation’s debt woes have already surpassed a perilous level. As of the end of September, household debt amounted to 991 trillion won, and the figure is almost certain to top 1,000 trillion won by the year’s end. What’s most pitiful is that poorer households are undergoing a greater ordeal. While the average household debt rose 6.8 percent from a year ago to 58 million won, households in the bottom 20 percent income bracket saw their debt surge 25 percent.
The problem is that these programs could mislead borrowers into believing that they don’t have to repay their debts because the government will take them over after all ― a serious moral hazard problem. This can be evidenced by the fact that many of the debt-relief beneficiaries are in arrears even after being rescued. The bigger problem is that they often fall into a debt trap again after having their debts written off.
It’s for this reason that the financial authorities should establish and hold fast to a principle ― everyone can get debt write-offs only once.
What’s needed is to ensure that there won’t be undue beneficiaries so ordinary citizens, who have been paying back loans faithfully, are not discriminated against.
The fundamental solution to all these problems, of course, will be to revitalize the economy and create more good jobs. Nothing is more important than helping heavily indebted people improve their debt servicing abilities through income growth.