Financial Services Commission Reviews 'Credit Recovery Support' for Delinquents... Financial Sector Raises Concerns Over Moral Hazard and Fairness

[Asia Economy Reporter Kwangho Lee] President Moon Jae-in has instructed the preparation of credit recovery support measures for delinquent borrowers struggling to repay loans due to the prolonged COVID-19 pandemic, prompting the Financial Services Commission (FSC) to begin formulating countermeasures.

The FSC is reportedly considering measures such as deferring the registration of delinquency records or shortening the period for sharing delinquency information, based on past precedents. The financial sector is concerned that providing relief to delinquent borrowers could lead to moral hazard or fairness issues.

According to financial authorities on the 24th, the FSC is exploring credit recovery support plans for delinquent borrowers, mainly through the Department of Microfinance. They are reviewing relief measures that were proposed following past crises such as the International Monetary Fund (IMF) crisis or the credit card crisis.

Currently, if a borrower delays repayment of a loan from a financial institution for more than three months, a delinquency record remains with the Korea Credit Information Services for up to five years, restricting not only loans but also credit card usage.

For this reason, the FSC is reportedly considering a measure to defer the registration of delinquency records. Since delinquency information is used as past credit history even after repayment, there is a judgment that it is necessary to minimize disadvantages arising from this process.

They are also reviewing ways to shorten the period during which delinquency records are shared.

According to the Credit Counseling & Recovery Service, the number of borrowers who applied for debt adjustment due to decreased repayment ability after borrowing money from financial institutions increased from 59,000 in the first half of 2019 to 63,000 in the first half of this year.

If the temporary loan maturity extension and interest payment deferral measures introduced as COVID-19 support end, the number of borrowers at risk of default could increase further. With interest rate hikes also anticipated, the debt burden itself is expected to grow.

The financial sector is concerned that providing relief to delinquent borrowers could cause moral hazard or fairness issues in credit evaluation.

A bank official said, "Due to the temporary loan maturity extension and interest payment deferral measures, it is difficult to confirm delinquency rates," adding, "This could increase the burden on banks and, conversely, become a burden for diligent borrowers who have been repaying their debts."

Another official stated, "Since repayment history is already reflected in credit evaluations, providing incentives could lead to fairness issues."