Credit Defaulters to be Bailed Out, Depending on Their Circumstances

For the 5.2 trillion won debts of 800,000 multiple credit defaulters who have debts from several financial institutions, parts of the total debts are to be written off.

However, when their total debts are to be written off up to 33 percent in standard, the Korea Asset Management Corp. (KAMCO) announced recently that it would write off up to 70 percent of total debts for a million debtors, which is expected to bring about debates on fairness issue.

The Korea Development Bank announced on October 19, with LG Investment & Securities Co., the Bank will consult with 10 participating institutes and for 800,000 credit defaulters whose arrearages are less than 30 million won and months in arrear are less than 48 months, jointly draw and reschedule the debts of 5.2 trillion won.

“With double-calculated debts excluded, the number of debtors and the amount of debts decreased from the expected million multiple debtors and 6 to 7 trillion won debts,” explains a Korea Development Bank official.

Based on the loan bonds of multiple debtors, the Korea Development Bank will issue asset-backed Securities (ABS) in the amount of 1.5 trillion won (first, 400 billion won, and then 1.1 trillion won) around October 29 and 30 through the Special Purpose Company (SPC), which will be newly established at the end of this month. In addition, Korea Information Service (KIS), designated as an AMC, will launch the debt rescheduling program, starting from this November to the end of this year.

The extended maturity and the reduced interest-rates for the debtors are the Credit Recovery Supporting Service (CRSS) standard of maximum 8 years and 6 percent per annum, and about 33 percent of the total debts are to be written off. Five banks—Kookmin (including Kookmin Card), Woori, Hana, Chohung, Industrial Bank of Korea, and five credit card firms—LG, Samsung, Foreign Exchange, Shinhan, Hyundai, participated in this program.

However, KAMCO announced recently that for 960,000 credit defaulters, it would write off the total debts up to 70 percent and extend the maturity from five years to eight years. Therefore, it is expected that the credit defaulters of the Korea Development Bank will strongly object to this management of KAMCO.

“It has become hard for the multiple debt programs to work out properly with KAMCO, which has purchased bad loans from financial institutes at less than 15 to 20 percent of book value on average price,” an official of a commercial bank worries. “‘Moral hazard,’ is highly predictable when debtors would wait for the debts to go over to KAMCO in order to get their total debts written off.”

Joong-Hyun Park sanjuck@donga.com