[New Supplementary Budget] "Bad Bank" Launched... Debt Relief for Over 7 Years and Up to 50 Million Won

To Be Established Under KAMCO
Targeting Debts Over 7 Years and Under 50 Million Won
Bulk Purchase of Non-Performing Loans from Financial Institutions
Estimated Funding Requirement: About 800 Billion Won
400 Billion Won to Be Raised Through Second Supplementary Budget
Remaining Funds Provided by Banks
Approximately 1.13 Million Beneficiaries

The outline of the long-term delinquent debt restructuring program (Bad Bank) has been revealed. The Korea Asset Management Corporation (KAMCO) will establish a joint-stock company to purchase long-term delinquent unsecured personal loans (including those of individual business owners) in bulk. Half of the required funding will be provided by banks. The aim is to give people trapped in debt for an extended period a chance to recover and to use this as a foundation for domestic demand recovery.

On June 19, the Financial Services Commission announced this "Long-Term Delinquent Debt Restructuring Program." This announcement was made as part of an explanation for the government's second supplementary budget proposal, and the final details may change depending on the National Assembly's budget review.

The Bad Bank will be established as a joint-stock company under commercial law, funded by KAMCO. A Bad Bank can generally be set up as a joint-stock company, a limited liability company, or a non-profit corporation. Song Byungkwan, Director of the Inclusive Finance Division at the Financial Services Commission, explained, "When reviewing income and assets, we plan to receive personal information, if possible, to conduct a comprehensive review. To do so, the entity needs to be clearly defined, which is why we decided on the joint-stock company structure under commercial law."

The program targets unsecured personal loans (including those of individual business owners) that have been delinquent for seven years or more. The "seven years or more" standard was chosen because this is the maximum period for which delinquency information is shared, and it is also the period after which reapplication is possible following bankruptcy or discharge.

The debt restructuring amount is capped at 50 million won. This figure was set considering the average debt amount of 44.56 million won among applicants for debt restructuring at the Credit Counseling & Recovery Service (CCRS).

Once the Bad Bank is established, it will purchase the relevant debts from financial institutions at prices ranging from 1% to 5% of the face value. Typically, the purchase price ratio for non-performing loans (NPLs) is around 1% to 3%. Song explained, "To purchase as many debts as possible, resistance from the selling financial institutions needs to be minimized. When KAMCO makes purchases, a new price table will be created through an accounting firm, and for the budget request, the purchase price ratio was set at 5%."

The required funding is estimated at approximately 800 billion won. The total amount of delinquent loans of seven years or more and 50 million won or less is about 16.4 trillion won. Multiplying this by the average purchase price ratio (5%) yields roughly 800 billion won. Of this, only 400 billion won will be secured through the second supplementary budget. The remaining 400 billion won will be provided by the banks.

Song stated, "The government will provide 400 billion won as seed funding, and the remainder will be covered by the financial sector. We have confirmed that there is consensus on this approach within the financial sector."

Once the Bad Bank purchases the debts, collection activities will be immediately suspended. After a thorough review of income and assets, the debts will either be written off or restructured. The Financial Services Commission emphasized that, to prevent diligent payers from feeling relatively disadvantaged, only those who have lost repayment ability to a degree comparable to bankruptcy will be strictly selected for support.

Debts will be written off only for those who have completely lost repayment ability, equivalent to personal bankruptcy. This will be limited to individuals whose assets are at or below 60% of the median income and who have no disposable assets other than those recognized in rehabilitation or bankruptcy proceedings.

Those who still have repayment ability but are struggling will undergo debt restructuring. Applicants supported by the Bad Bank will have up to 80% of the principal reduced and the repayment period extended to 10 years. This is a stronger measure than the CCRS individual workout standard, which allows up to 70% principal reduction and a maximum repayment period of eight years.

The Financial Services Commission stated, "Considering the unbearable collection and seizure pressures resulting from defaults, the likelihood of intentional delinquency is low. Anyone can become a long-term delinquent, and we ask for understanding as this program aims to promote social integration and provide opportunities for recovery to the vulnerable."