[Political Finance Runaway] "Law forces banks to bear self-employed losses... Not profit sharing but profit confiscation"

'Bank Debt Relief Act' Fully Launched
Industry, Experts, and Authorities Also Oppose

[Asia Economy Reporters Kwangho Lee, Kiho Sung] As a bill that would effectively obligate financial institutions to forgive debts when self-employed individuals and office workers experience income reductions due to disasters is being actively promoted, ‘political finance’?which disregards economic principles and reshapes finance?is spreading uncontrollably. Both financial companies and financial authorities express concerns that having private listed financial firms share disaster losses could trigger systemic financial risks. Experts criticize the politicization of finance, saying it crosses the line, warning that it could cause moral hazard among borrowers and make loans even harder to obtain for low-credit borrowers.

"Excessive Political Interference in Private Companies" Also Causes Discontent

◆Bill Shaking the Foundations of the Credit Society System= According to the political circles on the 22nd, the National Assembly’s Committee on Economy and Finance submitted amendments to the Banking Act and the Financial Consumer Protection Act at a plenary meeting held that day. If the bill passes, it is expected to go through the Legislation and Judiciary Committee and then be presented to the National Assembly plenary session within this month.

The amendments to the Banking Act and Financial Consumer Protection Act, which allow business owners or landlords affected by disasters who have lost jobs or taken leave to request loan reductions, have sparked controversy from the outset for ignoring market logic. The government, financial sector, and National Assembly experts have also voiced opposition. Financial Services Commission Chairman Eun Sung-soo emphasized in February, when Democratic Party lawmaker Min Hyung-bae proposed the bill, that "if banks are fined for refusing debt restructuring requests, the system and the credit society itself could be shaken," adding, "such matters should be handled by public finances, not financial companies."

The scope of disasters covered is also ambiguous. The proposed bill broadly encompasses all conceivable disasters, including natural disasters such as typhoons, floods, and heavy rains; social disasters such as fires, collapses, and explosions; and other disasters for which the president can issue a crisis alert above the warning level. Additionally, currently socially problematic issues such as infectious diseases, livestock epidemics, fine dust, and environmental pollution accidents are included as disasters if they exceed a certain scale. For example, if fine dust becomes severe enough to cause significant damage, borrowers could demand principal forgiveness from banks.

The financial sector argues that this shifts losses from social disasters onto financial companies. Although finance is a regulated industry, it is still a private company, and there is strong dissatisfaction with excessive political interference. A financial sector official said, "When disasters occur, responses should come from public finances, so I don’t understand why private listed financial companies should share losses," pointing out, "Ultimately, this could lead to interest rate hikes, passing the burden onto other consumers who are faithfully repaying their loans." Another official lamented, "It means banks have to bear the losses of self-employed individuals. It feels less like profit sharing and more like profit confiscation."

"Bill That Destroys the Financial System Itself" Criticized

◆Concerns Over a Loan Cliff for Low-Credit Borrowers= Experts also warn that the bill reverses the current financial system and disrupts market order. Professor Kim Sang-bong of Hansung University’s Department of Economics criticized, "This bill destroys the financial system itself," explaining, "Loans are based on credit rating agencies’ evaluations, which determine limits and interest rates. If principal is forgiven, the system becomes useless." Professor Jeon Seong-in of Hongik University’s Department of Economics said, "Principal forgiveness and repayment adjustments should, in principle, be handled by the courts," adding, "If urgent, it should be resolved by injecting government funds."

There are also concerns about moral hazard, where borrowers might request principal reductions or take out loans without intending to repay if situations become slightly difficult. Professor Seo Ji-yong of Sangmyung University’s Business Administration Department said, "There could be issues of infringement on banks’ property rights and shareholder backlash," warning, "If loans become non-performing, banks themselves could face risks."

There is also a viewpoint that low-credit borrowers could face even more difficulties if the bill is applied. Professor Kim warned, "Although the law is likely made with good intentions, if it passes, banks will only lend to borrowers who can repay," cautioning, "This could make loans even harder for low-credit borrowers."