[Reporter’s Notebook] How the Lee Administration’s Bad Bank Can Avoid Becoming Populism

Reverse Discrimination Against Diligent Borrowers, Funding Challenges
Shifting the National Debt Burden Onto the Banking Sector

In his inaugural address, President Lee Jaemyung mentioned "people's livelihoods" as the first priority after his greetings. This likely reflects the public's sentiment that, when it comes to basic survival, neither politics nor ideology matters. According to a survey by Realmeter, "economic recovery and stabilization of people's livelihoods" (41.5%) was cited as the top priority for the president.

The national policy agenda outlined by President Lee in his inaugural speech is swiftly taking shape as concrete policies. The government is currently discussing the establishment of a "bad bank" as a financial measure for small business owners and the self-employed. A bad bank is a specialized institution that acquires and resolves non-performing assets of small business owners and the self-employed. This is being considered as a way to realize President Lee's pledge to provide "COVID-19 loan forgiveness and adjustment."

Since April 2020, financial authorities and the financial sector have been offering maturity extensions and repayment deferments on loans to small and medium-sized enterprises and small business owners who have faced liquidity issues due to COVID-19. Among these, approximately 50 trillion won worth of COVID-19 loans will mature in September. The Lee administration is keeping the door open to a range of options, from debt restructuring to debt forgiveness. It is also reportedly considering writing off long-term, small-scale delinquent loans through the bad bank. However, concerns have been raised about the potential reverse discrimination against diligent borrowers.

Securing funding is also a challenge. While the government is exploring ways to secure project funds through a second supplementary budget, this alone is insufficient. Therefore, the government is seriously considering expanding the scale of the bad bank's operations by collecting additional contributions from financial institutions, including commercial banks.

There is particular concern about the rapidly growing national debt burden. Government debt is expected to surpass 1,200 trillion won for the first time in the first half of this year. According to the IMF, Korea’s general government debt-to-GDP ratio this year will be the fourth highest at 54.3%, following Singapore (174.9%), Israel (69.1%), and New Zealand (55.3%). The recent case of the United States, which saw its national credit rating downgraded due to fiscal deterioration, is no longer just someone else's problem.

Shifting the burden of funding onto the banking sector is also problematic. Last year, the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) spent 1.3344 trillion won on social contribution activities, an increase of about 15% compared to the previous year?the largest amount ever. In addition to this, efforts to support people's livelihoods and promote mutually beneficial finance have continued. A financial sector representative stated, "We agree on the need to devise measures for financially vulnerable groups such as small business owners," but also pointed out, "The role of a 'bad bank' should be to help these individuals operate within the formal financial system. There is no precedent in any country for debt forgiveness or interest cost support."

In his inaugural address, the word President Lee mentioned most frequently after "the people" was "growth." In order for our economy to regain vitality and make a leap forward, policies must foster the self-sufficiency of small business owners. Just as a child who is given everything by their parents learns to do nothing on their own, careful policy design?including the selection of eligible recipients?is necessary to prevent the bad bank from becoming a tool of populism. Only then can we avoid the disaster of wasting tax money and being left with nothing but criticism.