New Start Fund of 30 Trillion Released... Distressed Debt Industry 'Tense'

[Asia Economy Reporter Eunju Lee] Since the financial authorities announced the Saechulbal Fund policy, there has been considerable tension in the non-performing loan (NPL) industry. With the authorities formalizing the purchase of NPLs worth 30 trillion won, the industry faces the risk of a sharp decline in NPL volumes, which are the core business foundation. NPLs refer to loan claims where banks or other financial institutions have not recovered principal or interest for more than three months.

According to the industry on the 11th, the financial authorities are on high alert about the market impact of the Saechulbal Fund policy. NPL companies bid on non-performing loans from financial firms and either recover them themselves or generate profits through resale. Representative companies include Korea Asset Management Corporation (KAMCO), Daishin F&I, and Hana F&I.

For these companies, the volume of NPLs released into the market has been steadily decreasing due to the government's loan repayment deferral policy after COVID-19, so they cannot help but worry about a further sharp drop in volume.

In fact, according to the Financial Supervisory Service, the NPL market size shrank from 3 trillion won in 2020 to about 2.4 trillion won in 2021. An industry insider said, "The market, which was only about 3 trillion won in 2020, shrank to the 2 trillion won range last year. Recently, due to the end of loan repayment deferral policies and interest rate hikes, we expected NPL volumes available for purchase to be supplied, but we believe this policy will have a negative impact on the market." Kim Ki-pil, head of financial evaluation at NICE Credit Rating, also explained, "The market is estimated to be around 3 trillion won, but if the government takes 30 trillion won worth of volume, it will inevitably have a significant impact on the market."

The banking sector also expresses dissatisfaction with the government policy that allows only the Korea Asset Management Corporation (KAMCO) to purchase non-performing loans. Until now, banks have reduced losses by auctioning off some of the loans that have been non-performing for over three months to NPL companies. Considering that the Saechulbal Fund operation period is three years, decision-making regarding the loans subject to this policy will be blocked for about three years. Therefore, banks will face considerable losses.

However, from the government's perspective, it is inevitable to prohibit the sale of loans of Saechulbal Fund borrowers to third parties such as NPL companies. A financial authority official explained, "NPL companies, in order to make profits, may decide to resell non-performing loans to loan sharks or others if recovery is difficult. Then, borrowers may face collection efforts on overdue principal and interest that they cannot repay on their own from loan sharks, etc." The policy of selling the relevant loans only to KAMCO must be maintained to achieve the policy goals.

The NPL industry is closely watching the detailed measures to be announced additionally. For now, the atmosphere is to observe the specific details of the Saechulbal Fund to be announced on the 16th. An anonymous NPL industry insider said, "Since NPL companies mainly handle secured loans, if the loans taken by KAMCO are mostly unsecured, the impact may not be as significant as expected," adding, "We need to see the government's specific follow-up measures first."