Gov’t to Bail Out Credit Delinquents

The government will either write off overdue interest on loans or transfer loans with high interest rates to loans with low interest rates for 460,000 credit delinquents who have failed to repay money borrowed from financial institutions or private lenders, or whose overdue loans amounts less than 10 million won, starting September.

As the government is expected to include credit delinquents with less than 30 million won in overdue loans in its bailout plan from next year, a total of 720,000 credit delinquents will benefit from the government’s rescue plan.

These measures were finalized at the fifth Presidential Council on National Competitiveness presided over by President Lee Myung-bak yesterday.

Under the plan, the government will create a fund amounting to 700 billion won. In the first phase, the government will purchase loans worth less than 10 million won and overdue for more than three months starting September.

Overdue interest fees will be written off and the beneficiaries of the bailout plan will be allowed to repay the loans for up to eight years, depending on their financial capabilities. During the process, they will be registered as those “under credit recovery” at the Korea Federation of Banks. But, if they repay the debt in time for two years, their financial delinquent records will be erased.

Also, the government will help credit delinquents who borrowed money from financial institutions or private lenders and whose credit rating stays between Grade 7 and Grade 10 transfer their loans borrowed at high interest rates to those with low interest rates.

The transfer program will be subject to those who borrowed less than 10 million won from financial institutions or private lenders at an annual interest rate higher than 30 percent and have repaid the money in time. In short, the government will help money borrowers to transfer their loans with high interest rates to loans with low interest rates with its credit recovery fund. Each borrower will face a different interest rate depending on his or her credit rating.

Regardless of the amount of loans, low-income credit delinquents can have their debt maturity lengthened and transfer their loans with high interest rates to those with low interest rates. However, mortgage loan is not subject to the program and low-income credit delinquents who have property to repay the debt cannot be supported by the government.

The government is also expected to allow credit delinquents with less than 30 million won in overdue loans to have their debt maturity lengthened or transfer their loans borrowed at high interest rates to those with low interest rates. In sum, 720,000 people, or 10 percent of 7.2 million whose credit rating stood between Grade 7 and Grade 10 as of late May, will be supported by the bailout program.

Also, the government will prevent collectors from calling or visiting money borrowers from 9 p.m. to 8 a.m. They will not be allowed to send letters of reminder to children of money borrowers.

In the meanwhile, the government’s rescue plan, which writes off overdue interest fees or allows borrowers to transfer to new loans with low interest rates, will bring about a debate regarding moral hazard.

A source from the Financial Services Commission said, “Debtors with mortgage or fortunes will be screened out. After watching the results of this year’s project, we’ll discuss complementary measures.” The Call Center for Credit Delinquents (1577-9499) will provide explanation on the plan, beginning 9 a.m. today.

parky@donga.com