[Exclusive] Over 70% of Debt Written Off, but Defaults Continue... Is Publicly Funded 'Debt Forgiveness' Justified?

Average Principal Reduction Rate for Purchase-Type Debt Restructuring at 73%
The Largest Age Group: 23,626 Borrowers in Their 40s
Re-default Rate After Debt Restructuring Also at 8.7%

The principal amount of bonds purchased by the Saechulbal Fund to restructure the debt of borrowers in financial distress or at risk of default has reached approximately 6.6 trillion won, with a recovery rate of only 3.4%. Additionally, the rate of re-default after debt adjustment stood at 8.7%. While the purpose of helping struggling borrowers make a fresh start is necessary, there are growing concerns that unconditional “debt forgiveness” should not result from the injection of massive public funds.

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According to materials titled “Utilization Performance and Share of Financial Companies for the Saechulbal Fund” submitted by Representative Park Sunghoon, a member of the National Assembly’s Political Affairs Committee, and provided by Korea Asset Management Corporation (KAMCO) on September 11, as of the end of June, the contractual amount of bonds purchased by the Saechulbal Fund totaled 6.5931 trillion won. In contrast, the amount recovered was 221.7 billion won, resulting in a recovery rate of 3.4% compared to the contractual amount.

Launched in October 2022, the Saechulbal Fund is a program operated by KAMCO to help self-employed individuals restart their businesses and return to economic activity. Borrowers in default for 90 days or more can receive purchase-type debt adjustment, where their debt is bought out. Borrowers behind by less than 90 days at risk of default can pursue intermediary-type debt adjustment, which reduces interest rates through the Credit Counseling & Recovery Service. For purchase-type debt adjustment, borrowers in greater distress may have up to 90% of their net principal debt written off.

The average principal write-off rate for purchase-type debt adjustments was found to be 73%. As of the end of June, the number of individuals with purchase-type debt adjustment agreements through the Saechulbal Fund stood at 71,768, with an average debt amount of 80 million won and an average delinquency period of 10 months.

By age group, individuals in their 40s accounted for the largest share at 23,626. This was followed by those in their 50s (19,137), 30s (13,684), and 60s and above (11,973). The average principal write-off rates by age were 76% for those in their 20s, 73% for those in their 30s, 73% for those in their 40s, 73% for those in their 50s, and 75% for those aged 60 and above, indicating little variation across age groups.

By industry, the accommodation and food services sector had the highest number of participants at 22,166, followed by wholesale and retail (19,743), personal services (15,162), and manufacturing (5,174). The average principal write-off rates were 74% for wholesale and retail and personal services, 73% for accommodation and food services, and 71% for manufacturing.

There were also a significant number of cases where borrowers fell behind on payments again after debt adjustment under the Saechulbal Fund. From 2023 to the end of June this year, out of 71,768 individuals whose debt adjustment was finalized, 6,275 experienced re-default, resulting in an overall re-default rate of 8.7%. Broken down by year, in 2023, 3,913 out of 15,417 agreement holders re-defaulted, a re-default rate of 25.4%. In 2024, 1,987 out of 14,266 re-defaulted, translating to a rate of 13.9%. Although the re-default rates among those who signed agreements last year and this year were just 0.1% and 0.0% respectively, it is difficult to compare annual figures directly because little time has elapsed since their debt adjustment.

While government-level support is needed to help distressed borrowers recover, there are calls that simply writing off debt indiscriminately should not be the approach. The funding for the Saechulbal Fund comes from government contributions and KAMCO loans. As of the end of June, government contributions amounted to 2.91 trillion won.

Representative Park stressed, “The Saechulbal Fund is a necessary system intended to help self-employed individuals and vulnerable borrowers recover amid the COVID-19 pandemic and economic downturn, but since a large amount of public funds is being poured in, we must carefully examine its effectiveness and sustainability.”

Seo Jiyong, Professor of Business Administration at Sangmyung University, pointed out, “A structure where a large amount of principal can be written off after delinquency is repeated may create fairness issues for diligent payers, so post-adjustment management must be strengthened.”

Meanwhile, KAMCO has also decided to strengthen its property verification process this year to prevent moral hazard, by including the status of virtual assets and unlisted stock holdings, and to lower the minimum principal reduction rate from the previous 60% to 30% for debtors with high repayment capability, such as when the repayment ratio exceeds 100%.

This content was produced with the assistance of AI translation services.