The lend industry is not actively taking part in the bad bank (New Leap Fund), a debt relief program for long-term borrowers in arrears. That is because selling delinquent loans on the market fetches a higher price than transferring them to the New Leap Fund. While the financial authorities are encouraging participation by offering incentives, the response has been lukewarm. Some say the lend industry is falling short of its social responsibility.
According to the financial industry on the 1st, as of last month, 22 lending companies said they would sell loans in arrears to the New Leap Fund. That is only around 10% of the lending companies eligible to participate in the New Leap Fund. Only two of the participating companies are among the top 10 by asset size. With the top 10 companies holding about 80% of the lend industry's total loans in arrears, participation by large firms is essential.
The New Leap Fund is a program jointly promoted by the Financial Services Commission (FSC) and Korea Asset Management Corporation (KAMCO) to help long-term borrowers in arrears restart. The New Leap Fund totals 840 billion won, formed with 400 billion won in government finances and 440 billion won in contributions from the financial sector, and will buy and write off unsecured loans in arrears held by financial institutions that are at least seven years old and 50 million won or less. The New Leap Fund is expected to be funded by about 360 billion won from banks, 40 billion won from life and nonlife insurers, 30 billion won from specialized credit finance companies, and 10 billion won from the savings bank industry.
According to KAMCO, the volume of loans eligible for the New Leap Fund from the lending sector is 6.7 trillion won, more than the combined amounts from cards (1.9 trillion won), banks (1.23 trillion won), insurance (640 billion won), and mutual finance institutions (600 billion won). The government's suggested average purchase price ratio for loans in arrears is around 5%, but selling them to the market can yield about 20%.
For example, disposing of a 1 million won nonperforming loan on the market can bring in 200,000 won, but transferring it to the New Leap Fund would bring only 50,000 won. Assuming all lending-sector volume is transferred to the New Leap Fund, the lend industry would receive about 1 trillion won less than selling on the market. The lend industry argues that selling loans in arrears on the market can fetch as much as 25%–30%, in which case the industry's losses would be even larger.
Lee Eog-weon, chair of the Financial Services Commission (FSC), in order to encourage participation by the lending industry, mentioned benefits equivalent to designation as an "excellent microfinance lender" for companies that join within the year. Excellent lenders can borrow money from banks at low interest rates. However, funds raised from the banking sector for use as lending resources by excellent lenders are known to account for less than 10% of their total funds.
A lend industry official said, "Unless incentives are prepared to at least offset some of the losses incurred by the lend industry when selling loans in arrears to the New Leap Fund, there will not be many who participate actively."