South Korea's financial authorities have begun a full-scale overhaul of the structure of the private debt collection market after President Lee Jae-myung (이재명) recently publicly pointed to problems in practices for collecting long-overdue debt. The plan is to switch the market for buying and collecting non-performing loans (NPLs) from a registration system to a licensing system to reduce excessive collection and strengthen protection for debtors. In the financial sector, some expect the move could become a turning point in changing a market structure centred on small collection firms.

According to the financial sector on May 28, the Financial Services Commission held its fifth Inclusive Finance Grand Transformation meeting and announced the direction for forming and operating an inclusive finance strategy task force and a plan to shift the business of collecting purchased claims to a licensing system.

The move is seen as having gained speed after the recent "Sangnoksu" controversy. Earlier, the president shared a report on social media on May 12 that overdue debt from the credit card crisis in the 2000s was still being collected and criticised it as "primitive predatory finance."

After Shinhan Card and Hana Bank decided to sell long-overdue debt held by Sangnoksu to KAMCO's New Leap Fund, moves to clean up long-overdue debt spread across the financial sector. Financial authorities are also leaning toward the view that they need to fix the overall structure of the collection market, beyond simply cleaning up debt.

As a result, the measures are being assessed as aimed more at changing how the financial system works than at simply tightening collection rules. While the financial sector has focused on recovering overdue debt and managing soundness, the plan includes a direction to institutionally incorporate debtor protection and support for recovery within the financial system.

Lee Eok-won (이억원), chairman of the Financial Services Commission, also said that day he would change practices for managing and selling overdue debt from a focus on maximising debt recovery to a structure that embeds the value of protecting debtors.

◆ Shift to licensing and restructuring of the collection market accelerates inclusive finance

The core is to shift purchased-claims collection businesses to a licensing system. Currently, they can operate through registration if they meet certain requirements. Going forward, only companies in which financial firms own at least 50 percent will be allowed to operate, and the capital requirement will be raised sharply to 3 billion won from 500 million won. They must also have at least 20 full-time employees, including 5 professionals, and a strengthened IT security system.

Financial authorities view the current market structure as causing long-term and excessive collection. As of the end of last year, there were 911 registered purchased-claims collection businesses, but the average number of employees was about 6. By contrast, the Financial Supervisory Service inspected only an average of 23 companies per year over the past 5 years. Authorities judge that substantive supervision is difficult under the current structure.

In particular, the proliferation of small firms is seen as fuelling price competition for overdue debt, which in turn leads to a vicious cycle of aggressive collection or pressure to hold debt for a long time.

The FSC disclosed that day a complaint case in which debt was transferred to a loan company after a credit card delinquency more than 10 years ago and new accounts were repeatedly seized, making economic activity itself difficult. Financial authorities see the current market structure centred on small firms as causing long-term and repeated collection.

The market is focusing on the possibility that the move could lead to a reshaping of the NPL market. Banks, savings banks and credit-specialised financial firms have managed delinquency rates and soundness indicators by selling overdue debt externally. The top 30 purchased-claims collection companies bought 5.9 trillion won worth of overdue debt from the financial sector last year.

Savings banks and the card and capital industries have relatively high reliance on selling overdue debt. If the number of participating firms decreases, there could be changes in prices or transaction structures in the overdue debt sales market.

A financial industry official said, "I sympathise with the authorities' intent itself," but added, "If purchase regulations are strengthened, concerns about who will ultimately take overdue debt will inevitably grow."

Still, the FSC decided to grant a 3-year grace period to existing companies in consideration of market shock. Companies that fail to obtain a licence must sell the debt they hold to other financial firms or collection companies, or cancel it.

In and around the financial sector, some also interpret the move as an opening signal showing the new government's direction on inclusive finance policy, beyond simple debt collection regulation.

Separately, the FSC decided to launch an Inclusive Finance Strategy Task Force to comprehensively review the credit evaluation system and the supply structure of finance for ordinary people. It also officially mentioned the awareness that a soundness-centred supervisory system unintentionally expanded financial exclusion, prompting the financial industry to closely watch the possibility of changes in the supervisory system.

FSC Chairman Lee said, "It is time to consider at the financial system level the problem that once someone becomes delinquent, they cannot return to normal economic activity for a long time." He added, "I will change practices of selling overdue debt and the structure of the collection market from a focus on maximising debt recovery to a direction that embeds the value of protecting debtors."

He added, "Purchased-claims collection is an important back-end function of the credit system, but issues of long-term and excessive collection have been raised steadily." He said, "Even if it is an exercise of creditors' rights, if it imposes a level of burden and pain that is difficult for society to accept, it will be difficult for the business to be recognised as legitimate."