As financial authorities implement a special debt discharge scheme that sharply reduces repayment burdens, attention is focusing on its impact. The support limit for a programme that writes off remaining debt when vulnerable borrowers such as basic livelihood recipients and severely disabled people repay diligently for a certain period has been expanded significantly to 50 million won from 15 million won. While there is consensus on the policy goal of helping low-income people get back on their feet, concerns are also being raised about increased burdens for financial firms and moral hazard.

The Financial Services Commission said on Jan. 29 it will apply an increased amount eligible for special debt discharge for vulnerable borrowers under the Credit Recovery Committee's liquidation-type debt restructuring programme. Under the scheme, vulnerable borrowers who repay diligently for at least 3 years through debt restructuring and have paid back more than half of the restructured debt will be discharged of the remaining debt.

At an on-site meeting on low-income finance and debt restructuring hosted by the FSC in October last year, counsellors strongly raised voices that debtors with almost no ability to repay are being neglected because they cannot receive special debt discharge if their debt slightly exceeds the threshold. The latest expansion measure is a follow-up step reflecting that awareness of the problem.

FSC Chairman Lee Eok-won (이억원) has also stressed the need for improvements, calling in a public agency work report for more active identification and support for borderline vulnerable borrowers. Policy authorities expect the measure will allow vulnerable groups that had fallen into blind spots under the previous scheme to gain a practical chance to make a fresh start.

Kim Eun-kyung (김은경), chair of the Credit Recovery Committee, explained that the social safety net would be further strengthened by easing excessive repayment burdens for vulnerable borrowers whose economic activity is constrained by factors such as old age and disability, and by helping them return to daily life and become self-reliant. The committee plans to provide comprehensive support alongside debt restructuring, including job placement links, income support, medical and housing assistance, and psychological counselling.

◆Credit Recovery Committee stresses strict verification amid moral hazard debate

But the financial sector's view is not entirely positive. As the size of debt eligible for special discharge expands by more than three times, financial companies' loss burden is also bound to grow. In particular, amid an economic slowdown and a rising delinquency rate, concerns are being voiced that risks related to vulnerable borrowers could grow.

A banking industry official said, "We agree it is a necessary policy from the perspective of a social safety net, but if the scope of discharge widens sharply, the burden of managing soundness in the banking sector could increase." The official said it could also become a catalyst for more delinquent borrowers to apply for debt restructuring.

Debate over moral hazard is also continuing. Critics say that if it becomes known that a sizable amount of debt is extinguished after only a certain period of diligent repayment, some borrowers could loosen their willingness to repay or intentionally choose debt restructuring more often. Some in the financial sector worry that repeated debt relief policies could spread an attitude of "hold out and it will be cut."

The Credit Recovery Committee plans to apply strict verification procedures, such as closely screening income and asset status, in response to moral hazard concerns. It aims to ensure benefits go to borrowers who truly need support and to thoroughly uphold the purpose of the system by confirming a track record of diligent repayment for at least 3 years and the will to repay.

As such concerns surfaced, FSC Chairman Lee dismissed them during a work report for financial institutions, saying, "This is a system to give vulnerable groups such as basic livelihood recipients and severely disabled people a chance to make a fresh start," adding, "I think it is not moral hazard or another issue."

Kim said, "Vulnerable groups receive services through the government's social security system, but we want to look closely at whether they are receiving services properly or receiving excessive supply, and try to ensure there is no moral hazard."

◆Amid positive views on safety net strengthening, concerns also persist over financial stability

There are also views that assess the policy effect positively. The argument is that raising the chance of rehabilitation for vulnerable groups could reduce social costs in the long run and improve the efficiency of the financial system by clearing non-performing loans that are effectively difficult to recover. The logic is that medium- to long-term stabilising effects outweigh short-term losses.

Ultimately, the key is balance between expanded support and financial stability. A growing view is that sophisticated management measures should accompany the policy so that financial-sector risks do not accumulate excessively while achieving the policy goal of protecting vulnerable borrowers. Assessments say whether the special discharge scheme takes root as a social safety net or becomes a spark that fuels the burden on the financial sector and moral hazard debate will depend on how it is run going forward.

A banking industry official said that regarding the impact on financial firms, financial authorities would have expanded the scheme to a reasonable level within a range that does not 크게 affect soundness, adding that as with any system there are good-faith beneficiaries but there are inevitably voices concerned about moral hazard.

Another banking industry official also said the impact on soundness indicators such as the banking sector's delinquency rate or NPL ratio would likely be limited in the short term because the targeted borrowers are vulnerable groups that have already gone through debt restructuring procedures. But the official said the effectiveness of the scheme and the possibility of moral hazard should be evaluated over the medium to long term based on actual operating results, adding that banks plan to closely manage the impact on soundness through provisioning and preemptive risk management systems.