[2023 Economic Policy] Expansion of Mortgage Debt Adjustment... 'Unemployment/Business Closure → Sharp Sales Decline'

Establishing DSR for Household Debt Management
Extension of KAMCO Personal Delinquent Debt Purchase Fund

Reorganization of Management System for Marginal Companies

[Asia Economy Reporter Sim Nayoung] To manage potential financial risks next year, the government will expand debt adjustment programs for vulnerable borrowers. Banks will broaden the scope of mortgage loan debt adjustments they implement independently. Currently, only vulnerable borrowers struggling to repay principal and interest, such as 'unemployed, closed business owners, or those with illness owning a single home valued under 600 million KRW,' are eligible. Going forward, debt adjustments will also be available in cases of 'sharp declines in sales or sudden increases in financial burdens due to interest rate hikes.'

The Korea Asset Management Corporation (KAMCO) has decided to extend the application deadline for its personal delinquent loan purchase fund (2 trillion KRW), which was scheduled to end in December. This fund directly purchases household credit loans overdue by more than three months from banks and reduces the principal. The government plans to submit the Personal Debtor Protection Act to the National Assembly to activate debt adjustments and limit excessive interest burdens.

In the household debt sector, a loan system based on repayment ability will be established. The representative system is the Debt Service Ratio (DSR), which is the ratio of the total loan principal and interest an individual must repay in a year to their annual income, capped at 40%.

Lee Sehoon, Secretary General of the Financial Services Commission, explained, "While the goal is a soft landing of the real estate market, there is also a goal to manage the risks of excessively increased household debt, so we plan to operate loan regulations in harmony. The overly strict Loan-to-Value (LTV) regulations will be normalized, and the DSR regulations will be maintained for the time being."

Workout Target Companies Expanded to Those with Credit Extensions of 1 Billion KRW or More

The management system for marginal companies will also be refined. When diagnosing insolvency, industry-specific evaluation criteria will be established to refine corporate credit risk assessments, and the scope of companies eligible for workouts will be expanded to include smaller companies. Currently, only companies with credit extensions of 3 billion KRW or more are eligible for workouts, but starting next year, this will be expanded to companies with 1 billion KRW or more. Additionally, 1 trillion KRW will be newly raised next year for the Corporate Restructuring Innovation Fund, which will be linked with KAMCO’s existing small and medium-sized enterprise (SME) and rehabilitation programs.

Measures to increase the success rate of SME rehabilitation will be enhanced. Focused financial analysis support for SMEs capable of recovery will encourage early rehabilitation applications.

A new "Rapid Rehabilitation Pathway Consulting" program will be established to guide this process. A Ministry of Economy and Finance official explained, "To expedite rehabilitation procedures, rehabilitation courts will be additionally established in Suwon and Busan, in addition to Seoul."

KAMCO’s rehabilitation company loan program will be expanded to include companies showing signs of insolvency. Currently, only companies undergoing or completing rehabilitation procedures are eligible. To support SMEs facing financial difficulties even after rehabilitation procedures end, a system will be introduced where KAMCO provides payment guarantees for bank loans. This method guarantees loans from banks to companies with a history of using KAMCO’s rehabilitation company loan program.

For marginal SMEs, a total of 1.1 trillion KRW in low-interest funds, guarantees, and debt adjustments will be provided. Furthermore, when debts to Korea Trade Insurance Corporation, Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea are reduced or waived, the burden of representative joint guarantees will be alleviated.