Enforcement of the Law from the 17th... Strengthening Debtor Protection Responsibilities
Activation of Financial Companies' Own Debt Adjustment
Financial Research Institute: Differentiate from Shinbokwi Debt Adjustment to Enhance 'Effectiveness'
Shinbokwi Needs Complementary Role Including Strengthening Multi-Debtor Adjustment Function
FSS Pre-announces Administrative Guidance Revision on Debt Collection and Loan Claim Sales Guidelines
With the Personal Debtor Protection Act, which aims to activate financial companies' self-debt restructuring and strengthen the responsibility to protect individual debtors, scheduled to take effect on the 17th, there have been calls for the need to encourage financial companies to establish differentiated debt restructuring methods that reflect the nature of the financial company and the characteristics of the borrower in order to enhance the effectiveness of self-debt restructuring by financial companies.
On the 14th, the Korea Institute of Finance released an analysis in a report titled "Tasks to Enhance the Effectiveness of Financial Institutions' Self-Debt Restructuring." The Financial Supervisory Service has pre-announced administrative guidance on revisions to the guidelines for debt collection and loan receivables sales by the 1st of next month, coinciding with the implementation of the Personal Debtor Protection Act on the 17th.
The newly implemented Personal Debtor Protection Act regulates the entire process of resolving delinquencies on loan-type products, focusing on activating creditors' self-debt restructuring, reducing delinquency burdens, and prohibiting excessive collection. Until now, personal debt restructuring was led by the Credit Counseling and Recovery Service (CCRS) or courts, but going forward, if an individual debtor requests debt restructuring, the financial company must accept it or notify the debtor of whether it will accept it after review.
Although guidelines for self-debt restructuring already existed by industry sector, they were not activated. This was due to a lack of recognition of the effect of increasing recovery rates through debt restructuring and the absence of a comprehensive system covering the overall handling of non-performing loans. The banking sector currently conducts debt restructuring for delinquent and at-risk borrowers independently through systems such as Personal Business Loan 119 or Credit Loan 119. The savings bank sector has regulations to support debt restructuring for vulnerable borrowers, and the specialized credit finance sector has guidelines to activate pre-workout, all of which serve as autonomous references for debt restructuring.
Researcher Oh Tae-rok pointed out, "Recovery through debt restructuring generally takes a long time, making it less attractive compared to sales that can recover funds quickly, and the effect of improving recovery rates has not been fully felt due to management costs and other factors." He added, "Although the methods to maximize recovery differ depending on the characteristics of non-performing borrowers and non-performing loans, there has been no system introduced to comprehensively oversee this."
He also expressed concerns that even with the implementation of the Personal Debtor Protection Act, individual financial companies' self-debt restructuring methods are likely to remain largely similar to the current system centered on the CCRS. Individual debtors can choose the more favorable restructuring plan between CCRS debt restructuring and the financial company's self-debt restructuring. In the case of self-debt restructuring, if a higher reduction rate is applied than CCRS, the recovery rate decreases compared to when the debtor chooses CCRS debt restructuring, so financial companies are structurally compelled to apply relatively lower reduction rates.
Researcher Oh analyzed, "If the debtor is offered a self-debt restructuring plan with a higher reduction rate, they will accept it. When the incentives of financial companies and debtors are combined, even if self-debt restructuring is activated, the method is likely to converge to the level of the CCRS debt restructuring system."
Accordingly, he emphasized the need to encourage financial companies to differentiate their debt restructuring methods according to their characteristics alongside the implementation of the Personal Debtor Protection Act. If self-debt restructuring is not differentiated from CCRS debt restructuring, it will be difficult to expect substantial improvements in terms of debtor protection.
In particular, he advised that financial authorities should foster an environment where individual financial companies can attempt various debt restructuring methods and support them in selecting appropriate methods and establishing them. For example, if differentiation is difficult in terms of principal and interest reduction rates and repayment grace periods, exploring differentiation in loan accessibility during the debt restructuring period or credit penalties could be considered.
Researcher Oh stated, "Financial companies should be encouraged to provide customized debt restructuring functions that reflect the borrower's situation beyond standardized frameworks and to find debt restructuring methods that can improve recovery rates according to the characteristics of each company and borrower." He added, "It may take considerable time to directly experience the effect of improving recovery rates, so continuous efforts will be necessary."
Furthermore, he noted that the CCRS should also strengthen its debt restructuring functions for multiple debtors and continuously discover functions that individual creditors find difficult to perform in debt restructuring and debtor credit recovery. Considering that most demanders, such as at-risk borrowers, are multiple debtors, CCRS debt restructuring can still provide greater assistance in alleviating debtor burdens.
Researcher Oh explained, "Know-how should be shared with individual financial companies that lack debt restructuring experience, and complementary roles should be identified to handle cases where financial companies find it difficult to propose suitable debt restructuring plans." He also suggested, "It is necessary to explore ways to support credit education for financial companies' self-debt restructuring personnel."
Meanwhile, financial authorities are conducting final checks to ensure the smooth implementation of the Personal Debtor Protection Act. The Financial Services Commission has formed a "Personal Debtor Protection Act Implementation Monitoring Team," led by Vice Chairman Kim So-young, to monitor the implementation status and plans to inspect internal operations of financial companies, including debt restructuring standards.
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