No More Cheap Money for Public Servants

For around one million civil servants nationwide, it seems hard to enjoy the benefit of cheap money from commercial banks in the future.

According to an announcement from the bank industry on February 3, 14 banks including Nonghyup, Kookmin and Woori decided to suspend low interest credit loans subject to public servants unless they cannot exercise security rights over civil servant retirement allowances.

Banks have loaned civil servant-borrowers money with around five percent interest under an agreement with the Government Employees Pension Corporation (GEPC). The agreement says: “The Government Employees Pension Corporation will remit civil servant-borrowers’ loans with their retirement allowances to their credit transaction accounts in case they do not pay back their borrowed money.”

Under government employee pension law, banks cannot exercise a security right over the retirement allowance of public servants, but the GEPC has guaranteed that government employees clear their bank debt first before any other things after they get their retirement allowance.

However, the practice has drawn banks’ attention as cases public servants have filed resulted in the court writing off their loans, and some of them redeemed their lending money since the Individual Credit Recovery Act, enacted last September, were reported.

Indeed, a court ruled that the retirement allowance of government employees couldn’t be used as a security.

A relevant official of a commercial bank said, “Moral hazard has become serious among public servants as some of them unscrupulously get write offs on their loans while taking advantage of institutions after using cheap money from banks.”

In fact, Woori Bank said that the number of civil servants who applied for debt redemption before a court has increased to a whopping 100 compared to 30 of last November, Hana Bank also reported the number surged to 58 from 32 during the same period.

Fourteen banks recently have submitted a joint petition to the Supreme Court to recognize public servant’s lending as a loan on security. Under the circumstances, banks are now considering reducing the amount of credit and raising interest rates for government employees to more than nine percent, in line with ordinary lending interest rates, after closing the agreement with the GEPC, in case their request is not accepted.

Seung-Jin Kim sarafina@donga.com