'Bad bank' to tackle credit-binge hangover
Seoul has launched a scheme to reschedule debts of almost half the 3.9 million South Koreans who have defaulted on millions of dollars of loans following the collapse of the country's consumer credit bubble.
Under a government initiative dubbed the 'bad bank' scheme, debtors can repay 3 per cent of their original loan to restore their credit worthiness and reschedule paying off remaining debt at a reduced interest rate of about 6 per cent over a period of up to 8 years.
'The bad bank programme is expected to be a successful solution to the serious credit delinquency problem in Korea,' said Yon won-young, head of state-run Korea Asset Management Corporation, which is managing the scheme.
Millions of South Koreans went on a massive credit binge in the late 1990s, fuelled by easy credit as banks and credit card companies competed for market share.
The banks were encouraged by the government, which hoped to jump-start an economic recovery off the back of domestic demand after the economic turmoil of 1998.
In a country that had one of the world's highest savings rates in the world and little experience managing credit, many South Koreans quickly spiralled into debt.
LG Card, the country's leading credit-card issuer, was rescued with a US$4.2 billion bailout package earlier this year. It is estimated that 1.8 million people with US$18 billion of debt will be eligible for the rescue package, which is open to people owing less than 50 million won (HK$331,000).
Banks and credit card companies will also be encouraged to join the 'bad bank' to reschedule non-performing loans. Most financial analysts have welcomed the government's effort to address private debt, but critics say the scheme discriminates against borrowers who keep up with their repayments. 'The government has repeatedly said this is a one-off scheme, but there is a high chance that these people will fall into debt again. It is too optimistic to expect that they will come into an income and not default again,' said Oh Suk-tae, chief economist of Citicorp.