Implementation of the ‘largest-ever credit amnesty’ for 290 million people, is it medicine or Germany?

Government and ruling party announce credit amnesty for those with delinquent debt of 20 million won or less
Risk of moral hazard and reverse discrimination, is this a ‘populist policy’ ahead of the general election?
There is also a positive effect “to the institutional system for vulnerable groups affected by the COVID-19 pandemic”

The government and ruling party are carrying out large-scale credit amnesty. After concluding the ‘Democratic Party-Government Council on Credit Amnesty for Common People and Small Business Owners’ held at the National Assembly on the afternoon of the 11th, Chairman Yu Yu-dong of the People Power Party Policy Committee said, “Among those in arrears of less than 20 million won from September 2021 to January 2024, those in arrears of less than 20 million won will be eligible for payment at the end of May 2024. “We have requested that those who repay the full amount by then be eligible for (credit recovery) support,” he said. The plan is to delete the delinquent records of delinquent borrowers who meet certain conditions. With the ‘historic credit amnesty’ plan announced ahead of the general election, market evaluations are sharply mixed.

More than during Corona, large-scale credit amnesty implemented

Credit amnesty refers to deleting delinquency history information so that vulnerable groups do not experience difficulties in future financial transactions. According to the current system, if a loan is delinquent for more than three months, the Credit Information Service will retain the delinquency record for up to one year. This information is shared with financial institutions and credit rating agencies and is used for up to 5 years in financial transactions. However, when credit amnesty is carried out, the delinquency history information of borrowers eligible for support will not be shared among financial institutions, and will not be reflected in the credit ratings of individuals and self-employed businesses by credit rating (CB) companies.

If the delinquent record is deleted in this way, the delinquent borrower can normally use institutional financial services such as card issuance and loans. This means that it has the effect of providing relief to vulnerable borrowers who are experiencing a crisis due to economic difficulties. The number of people eligible for this credit amnesty expected by the government and ruling party is 2.9 million. This is significantly larger than the scale of the three previous credit amnesties, including 320,000 people in January 2000, 1.02 million people in May 2001, and 2.28 million people in August 2021.

What is noteworthy is that communication costs, which are non-financial liabilities, were included in debt restructuring for the first time. Late payment of communication bills acts as a deductible factor in personal credit evaluation scores, imposing restrictions on overall economic activities, including financial transactions. The government plans to strengthen the function of adjusting debt by combining financial debt and telecommunication debt only for vulnerable groups in the future. Currently, it is estimated that there are approximately 370,000 borrowers who have both financial company loans and communication bill arrears.

Criticism pours in over “populist policies conscious of general elections”

Accordingly, experts are criticizing that the credit amnesty policy should not be ‘abused’. This is because frequent credit amnesty can cause confusion in the overall credit evaluation-based financial system. Likewise, if a large number of delinquent records are deleted through credit amnesty, there will be no way to distinguish between those who have faithfully repaid their loans and those who have delinquent debt. This means that products must be sold to ‘long-term delinquent borrowers’, who are the biggest risk in the financial industry, under the same conditions as those with high credit. This is why concerns are raised that indiscriminate amnesty may increase the likelihood of financial insolvency.

Some point out that the role of ‘credit’ within the financial system itself may be blurred due to the government’s hasty intervention. In the future, a kind of moral hazard may arise where borrowers delay repayment in anticipation of a ‘credit amnesty’ whenever the economy worsens. The issue of reverse discrimination against those who faithfully repaid their loans under difficult conditions is also an issue that cannot be ignored. If the nihilism that ‘even if you work hard to repay is meaningless’ is prevalent in the market, there is a high possibility that financial market chaos will further intensify.

There is also criticism that this credit amnesty is a ‘populist (votes + populism)’ policy, such as the abolition of the financial investment income tax (gold investment tax) and the ban on short selling. The opinion is that the government and the ruling party are directly encouraging moral hazard to attract votes. However, the government’s position is that this credit amnesty plan is by no means a general election policy, and was announced after more than several months of deliberation starting in the second half of last year.

The effect of relief for the vulnerable cannot be ignored

On the other hand, there is an opinion that large-scale credit amnesty cannot be criticized unconditionally. The analysis is that it is meaningful in providing support for ordinary people who have suffered due to the COVID-19 pandemic to be incorporated back into institutional finance and provide a ‘foothold’ for a new start. In fact, borrowers who inevitably failed to meet the loan deadline during the COVID-19 pandemic are experiencing difficulties in all financial transactions due to their delinquent records.

The ‘Corona Credit Amnesty’ implemented in 2021 also had a definite relief effect for vulnerable borrowers. At that time, approximately 2.28 million people, including 2.113 million individuals and 168,000 self-employed individuals, benefited from credit amnesty. The average credit score for individuals rose from 678 to 702 points, and the average credit rating for individual businesses rose 0.5 grade from 7.8 to 7.3. There were approximately 114,000 individuals whose credit scores increased by more than 100 points.

Credit amnesty is an excellent means to achieve the goal of relief for the vulnerable. But at the same time, it also causes side effects on the financial system that cannot be ignored. People Power Party Policy Committee Chairman Yu Yu-dong said, “The financial sector has decided to come up with a plan to support credit recovery as quickly as possible, sign an agreement as early as next week, and implement the measures.” With the ‘shadow of upheaval’ looming over the financial industry, expectations and concerns about the future situation are mixed in the market.