Bad Credit Forgiveness Plan Spurs Debate

Since President-elect Lee Myung-bak’s announcement of a pardon for credit card delinquents, a debate has erupted in the domestic financial circle over how to readjust debts and whether to clear bad credit records.

Debt readjustment is feared to lead to moral hazard by credit defaulters, and the proposed elimination of credit delinquency records could deprive financial firms of a major asset.

Kang Man-soo, chief of the economic affairs subcommittee under Lee’s transition committee, said yesterday, “Debt readjustment does not exempt credit delinquents from repaying principal. Their existing loans will be replaced with new ones at appropriate interest rates.”

Korea Asset Management Corporation will start a “credit recovery fund” for the forgiveness program. The state-run company will raise funds to repay credit defaulters’ debts, but they must return the money to the fund later.

Lee’s estimate of the number of credit delinquents nationwide is also in question. He said his government will forgive the debts of 7.2 million defaulters with a credit rating between seven and ten.

This is because the Korea Federation of Banks, which keeps credit delinquency information for the nation’s legal financial firms, says 2.5 million credit delinquents were registered at the end of last year. A credit delinquent is classified as someone with a debt larger than 500,000 won and more than three months overdue.

In response, Kang said, “We don’t mean all of the 7.2 million credit delinquents will be eligible for our debt forgiveness plan from the beginning. After examining credit delinquency at financial firms and private lenders, we’ll decide who will be pardoned.”

Financial firms are also carefully watching the next government’s proposal to remove the credit records of credit card defaulters.

A Financial Supervisory Commission official said, “It’s possible to partially ease requirements to clear bad credit records, but credit data owned by financial firms and credit information firms are private assets. Therefore, if the government forces all relevant firms to clear credit records, it could bring about controversy over legal justice.”

Certain experts say Lee’s debt forgiveness proposal is not much different from the credit recovery programs offered by Korea Asset Management Corporation and Credit Counseling & Recovery Service.

The commission said, “So far, credit recovery programs have benefited credit delinquents who borrowed money from legal financial firms. However, the transition committee wants to include all credit defaulters, even those who borrowed money from private lenders, in its credit recovery program.”

The committee estimates that overdue loans at banks and savings and loans at eight trillion and those of private lenders at ten trillion won. Considering the enormous amount, some say the government might need to raise a “public fund.”

The committee scoffed at the notion, saying, “We think 700 billion won is enough to run a credit recovery fund. If we thoroughly take principal back after paying the back debts of credit defaulters, we will need no additional money to run the fund.”

larosa@donga.com chance@donga.com