Up to 1-Year Principal Repayment Deferral for Individuals and Self-Employed Facing Delinquency Risk

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[Asia Economy Reporter Hwang Yoon-joo] The government will grant up to a one-year deferment on principal repayment for individuals and self-employed borrowers facing delinquency risks due to the spread of the novel coronavirus infection (COVID-19).

On the 8th, the government finalized and announced strengthened support measures for vulnerable individual debtors at the 4th Emergency Economic Meeting chaired by President Moon Jae-in.

This credit recovery support plan includes activating a pre-workout program before individual debtors, whose income has sharply decreased due to COVID-19, fall into delinquency.

The plan expands existing COVID-19 financial support measures, which were focused on the self-employed, to some household loans, establishing a safety net to prevent individual debtors from becoming financial defaulters. However, the support targets are defined as individual debtors who have difficulty repaying household loans due to income reduction after the COVID-19 outbreak and are at risk of delinquency.

Since February, applicants must prove a decrease in monthly income due to unpaid leave or loss of work, and that their monthly income after deducting living expenses is less than their monthly debt repayment amount.

The pre-workout program targets those who are just before actual delinquency or within 90 days after delinquency registration. It supports not only individuals but also self-employed persons (individual business owners) who have household loans under their personal names.

However, the government limits the loans eligible for pre-workout to unsecured loans (excluding secured loans and guaranteed loans) and guaranteed policy microfinance loans.

In the banking and savings bank sectors, unsecured loans and credit card sectors are expected to include card loans as eligible. Cash advances from credit card companies are likely excluded from support.

Since unsecured loans were the easiest to access for economic agents hit by COVID-19, the government is postponing the principal repayment timing for these loans.

The government also includes policy microfinance loan products such as Sunshine Loans, Change Dream Loans, and Safety Net Loans in the pre-workout program.

The principal repayment deferment period is from six months to one year. However, agreed interest will not be deferred or reduced. In other words, interest must be paid while principal repayment is deferred.

Applying this method allows those with lump-sum maturity unsecured loans nearing maturity to extend the maturity by one year. During this period, only interest payments are required.

Installment loans will also have principal repayment deferred for one year.

This program will be operated from the end of this month until the end of this year, with participation from approximately 3,700 financial companies. If the COVID-19 situation continues, the principal repayment deferment period and program duration may be extended.

Multiple debtors owing to several financial institutions can adjust multiple debts at once through debt adjustment by the Credit Recovery Committee, in which all financial sectors participate as agreement institutions.

The Credit Recovery Committee adds COVID-19 victims to the credit recovery support targets, defers principal repayment, and reduces debt. If debt adjustment is difficult through individual financial companies or the Credit Recovery Committee, the Korea Asset Management Corporation (KAMCO)'s personal delinquent debt purchase fund is worth considering. If a debtor requests KAMCO to purchase their loan claims, KAMCO reviews and decides whether to accept the request.

KAMCO plans to purchase up to 2 trillion won worth of delinquent claims from small business owners affected by COVID-19 and undertake debt adjustments such as repayment deferment and long-term installment repayment.