Korea to allow non-profits to buy bad consumer loans

The Financial Services Commission (FSC) has proposed regulatory changes that would allow non-profit organizations to purchase bad loans from individual borrowers, expanding participation in the distressed debt market, according to financial industry sources on Monday.

The move, announced on June 5, aligns with South Korean President Lee Jae-myung’s campaign pledge to create a bad bank focused on small business owners and households.

Under the current law, only banks, non-banking financial institutions and Korea Asset Management Corp. are allowed to take over non-performing loans.

"The move aims to strengthen protections for individual borrowers, including long-term delinquent debtors, by allowing non-profits set up to help those unable to repay their loans by acquiring them," said an FSC official.

KOREA'S ROLLING JUBILEE?

The regulatory change could pave the way for a Korean version of Rolling Jubilee, a US fund launched in 2012 that uses donations to buy and forgive soured personal loans.

In August 2015, the city of Seongnam in Gyeonggi Province set up a non-profit group modeled after Rolling Jubilee.

The non-profit, which President Lee co-led during his tenure as mayor of Seongnam, purchased long-term distressed loans from financial institutions at 3-5% of their face value.

Borrowers were required to repay 7% of the original principal, after which the remaining balance was forgiven. The program was funded through donations of non-performing loans from financial companies and corporate sponsorships.

The project has later expanded to other local governments.

However, since last year, the institutions eligible to acquire personal financial claims have been limited to financial companies and public institutions.

"We'll extend eligibility for loan purchases to non-profit entities established to support the rehabilitation of debtors under government approval," said the FSC official. 

The non-profits dedicated to purchasing individual delinquent loans could assume the role of a bad bank, a key component of President Lee’s campaign pledge.

Addressing concerns over potential moral hazard, Lee had said that most long-term delinquent borrowers are unable, not unwilling, to repay their debts.

"Resolving these so-called 'zombie loans' not only reduces government welfare spending, but also helps reintegrate individuals into the labor market," he said in a YouTube post in 2017 promoting the Rolling Jubilee project for the city of Seongnam. 

Write to Yeon-Su Shin at sys@hankyung.com
 

Yeonhee Kim edited this article.