The government is moving forward with plans to establish a 'bad bank' to organize the liabilities of self-employed individuals. This measure arises as self-employed debt has emerged as a 'ticking time bomb' for the Korean economy ahead of the expiration of COVID-19 loans in September. Earlier, President Lee Jae-myung instructed after taking office to prioritize support for vulnerable groups and small businesses.
Experts believe the introduction of a bad bank could help self-employed individuals regain stability and positively impact economic recovery, although concerns about moral hazard and equity issues are also being raised.
The Ministry of Economy and Finance and other economic ministries have reportedly delivered a plan for fulfilling election pledges centered on bolstering financial support for vulnerable groups to the National Planning Commission. Based on this, the National Planning Commission is preparing detailed implementation plans and budgetary strategies for each department.
The government plans to establish a 'bad bank' under the Korea Asset Management Corporation (KAMCO) to specialize in purchasing and managing non-performing loans, and to expand the personal workout program of the Credit Recovery Commission. The bad bank is an institution that purchases and specializes in handling distressed assets from financial institutions. Specific details will be announced by the Financial Services Commission later this day.
The government is accelerating efforts to address the liabilities of self-employed individuals because related debts are rapidly deteriorating. According to the Bank of Korea's Financial Stability Report, as of the third quarter of 2023, the outstanding loans for self-employed individuals amounts to 1,064.4 trillion won. In particular, the delinquency rate for vulnerable self-employed individuals during the same period was reported at 11.55%.
Notably, in September, about 50 trillion won worth of loans to small businesses, which had their maturities extended during the COVID-19 crisis, will come due at once. According to the Financial Services Commission, the loans for self-employed individuals that had their maturities extended amount to 47.4 trillion won, while the loans with principal and interest repayment deferred are 2.5 trillion won.
Experts believe that debt relief for small businesses could play a positive role in economic recovery.
Professor Kim Ji-seop from Yonsei University stated, 'Providing self-employed individuals with opportunities for recovery in a depressed economy can contribute to economic stimulus,' adding that 'especially when looking at the cases in the United States and Europe, temporary relief may be more effective than long-term partitioning repayment of debt based on future income.'
However, concerns about moral hazards and reverse discrimination are also being raised by some.
Professor Kim noted, 'There are concerns that moral hazard may arise if the government relieves debts,' citing that 'even when the Obama administration in the United States preemptively relieved household debt, there were criticisms that excessive government finances were invested.'
Concerns are also raised about reverse discrimination against those who voluntarily and diligently repay their debts.
Professor Kwak No-seon of Sogang University expressed concerns, stating, 'While it is reasonable to support small businesses that have been affected by COVID-19, indiscriminate support for self-employed individuals who must exit due to simple management failures or structural competitiveness deficits could lead to excessive financial burdens.'
Professor Kwak further stated, 'Policies should be designed to separate small businesses that have suffered due to COVID-19 from those that need to close due to their business conditions.' He emphasized that 'in particular, consumer spending patterns have shifted from face-to-face to non-face-to-face since COVID-19, and support measures for small businesses should also be discussed in line with this change.'