The government will invest 1 trillion won this year into the Korea Asset Management Corporation (KAMCO), a public institution specializing in the management of non-performing assets. This measure follows a surge in business closures among self-employed individuals due to the impact of the economic slowdown and an increase in applications for the 'Fresh Start Fund' to repay debts.
According to the financial sector on the 2nd, KAMCO approved 'the issuance of new shares for capital increase' at a board meeting held in February to receive funding from the government for operating the Fresh Start Fund. The government is set to contribute 500 billion won in cash to KAMCO. The government is also discussing a plan to additionally contribute 500 billion won in kind this year. A KAMCO official noted, 'We have received part of the 500 billion won in cash from the government in mid-June' and added, 'Discussions are ongoing regarding the timing and method of in-kind contributions.'
The Fresh Start Fund is a debt adjustment program introduced in October 2022 to ease the burden on small business owners and self-employed individuals who have become unable to repay debts due to the impact of COVID-19. It provides debt adjustments by reducing the principal, extending the repayment period, or lowering the interest. It can reduce the loan principal by up to 80%, with a maximum debt adjustment limit of 1.5 billion won per person (collateral 1 billion won + unsecured 500 million won). Thus far, the government has contributed 1.71 trillion won to support the Fresh Start Fund, which would increase to 2.71 trillion won with the additional support of 1 trillion won this year.
The number of applicants for the Fresh Start Fund is rapidly increasing. As of the end of February, the cumulative number of applicants for debt adjustment is 113,897, and the total amount of debts applied for is estimated at 18.4 trillion won. This marks more than a doubling compared to the cumulative applicant count of 46,501 and the applied debt amount of 7.41 trillion won at the end of December 2023. Following the end of the small business loan repayment deferral and extension measures in September 2023, demand for applications surged.
The government's decision to increase the Fresh Start Fund from the existing 30 trillion won to '40 trillion won + α' and to relax qualification requirements has also influenced this trend. Initially, only those who sustained direct losses due to COVID-19, such as recipients of disaster relief funds, were eligible to apply for the Fresh Start Fund. However, the eligibility criteria have been expanded multiple times to include 'small business owners and self-employed individuals conducting business from April 2020 to November 2024.'
The issue is that as the number of applicants increases, the debt that KAMCO will have to shoulder naturally rises. The total amount of funding the government agreed to support at the launch of the Fresh Start Fund is 3.6 trillion won, meaning that KAMCO will have no choice but to issue bonds and debentures to secure the remaining funds. The burden of future losses is also expected to be considerable. KAMCO will purchase defaulted receivables from banks and other financial institutions for debt adjustment, and if the borrowers do not repay the amount of the debts, losses will occur. The government has estimated the expected loss rate for the Fresh Start Fund at 29.5%, which means that, relative to the fund size, 12 trillion won out of 40 trillion won may be recognized as losses. Given that it will be difficult for the government to fully cover these losses, concerns are growing that KAMCO's financial soundness could quickly deteriorate. KAMCO's liability ratio rose from 145.1% in 2022 to 222.2% last year.