“Bad Bank” Seen to Spread Moral Hazard

“The government’s excessive intervention in the issue of consumer credit default resulted in the spread of moral hazard and led to an increase in delinquency rates.”

In chorus, major bankers demanded measures to curb the spread of moral hazards at a meeting with the Bank of Korea`s governor, Park Seung, on March 19.

“It’s been getting harder to collect debt since the government’s announcement of the launching of the so-called bad bank, a bank for defaulters with payment plans,” said the banking industry leaders.

“Usually, delinquency rates fall during the first quarter,” they said. “Since the government announcement, delinquency rates in household loans and credit-card payments are rising. The government needs contingency measures before it implements a policy for personal loan defaulters.”

Concerned with the rising moral hazard, the government made it clear that there won’t be any bailout for defaulters in the future.

“The goal of the government’s policy, which is to give time and chances to defaulters to pay their loans, was not fully appreciated,” said Deputy Prime Minister and Minister of Finance and Economy Lee Hun-jai in his regular policy briefing. “They have to pay their debts on their own. There won’t be any follow-up measure.”

“The issue of default is the issue between financial companies and debtors over their private contracts. It will be the best way if both parties solve it on their own,” said a bank CEO on condition of anonymity.

“There are expectations that the government will do something for them,” said an executive at a state-owned bank. “Fewer and fewer people want to pay their loans in a normal fashion. Potential defaulters will likely default on their debts.”

“A further increase in defaults will drastically hurt the corporate health of the credit-card industry,” said Han Jeong-tae, an analyst with Mirae Asset.

Banks have unsuccessfully mulled measures to curve the increase in defaults. Industry insiders are concerned that the government measure for defaulters will increase the number of defaults.

“To curb the rising delinquency rate, measures should be taken to put a limit on cash advances and allow foreclosure of debt,” said a credit analyst. “Because the government demands us to extend the maturity of loans and go easy on collecting unpaid loans, there are few ways for us to lower the delinquency rate.”