Bad Bank: “It Is Worrisome”

In accord with aid policies of the government for credit delinquents who are willing to pay their debts but unable to pay back, the second “bad bank,” “Heemangmoa” or the “collection of hope” in which the “bad bank” buys bad credits from individual financial institutions and collect debts all together, will start operations at the beginning of May.

Bad creditors, who are willing to pay back their debts diligently, will have a chance to have a grace period before paying back their borrowed money for seven to eight years and to get cut in interest rates.

Regarding the “bad bank” which was launched to help ordinary credit defaulters last May, “Hanmaeum” (one spirit) Savings and Finance is the predecessor. However, it is a dominant view that Hanmaum Finance cannot achieve its original goal as many debtors have failed to repay money.

Some have already raised questions over the effectiveness of Heemangmoa as financial institutions have been reluctant to participate in the program.

High Rates of Delays in Hanmaum Savings and Finance–

Among the 1.8 million people with bad credit ratings who are carrying debts less than 50million won to more than two financial companies, only 176,000 have applied for programs for bad creditors in which they pay off original borrowed money over eight years after paying three percent of their primary debts in advance.

Delays of debtors in Hanmaum as of late March accounted for 19 percent of total borrowed money, which has been high, followed by 16 percent in late January and 18 percent late February.

Among those who applied for the program, 12,000 people were excluded according to the regulation, in which people who delayed their payment for more than three months cannot benefit from the program.

An official from Hanmaum said, “The rates of delays could go up as high as 50 percent since applicants pay back only 100,000 to 200,000 won a month in the beginning of the program, but the amount of money gradually increases.

Could Heemangmoa Make a Difference?-

Unfortunately, the prospect of Heemangmoa is more pessimistic than that of Hanmaum because only 45 financial institutions have shown their willingness to take part in buying bad credits compared to the 620 financial organizations of Hanmaum. Since Heemangmoa purchases bad loans at 4.08 percent of its nominal prices, that is far short of the average purchase price (7.9 percent).

Local Nonghyups and the National Credit Union Federation of Korea have refused to participate. Among 112 mutual saving banks, only five banks will take part in the program.

As opposed to Hanmaum, Heemangmoa does not receive applications individually but targets all credit defaulters regardless of their willingness, so the surge in the rate of delay is highly expected.

The subjects of Heemangmoa are around one million people. Their debts are estimated at 10 trillion won.

Im Byung-cheol, a researcher of the Korea Institute of Finance, said, “It is a right step to give one more chance to credit delinquents through the second “bad bank,” but it is doubtful how many of them have a real willingness to go back to their normal life.

Sun-Woo Kim sublime@donga.com