The Financial Services Commission plans to announce this month a plan to grant incentives and penalties to the lending industry in connection with the New Leap Fund. The lending industry has been reluctant about the New Leap Fund, which forgives the debts of long-term borrowers in arrears, but as President Lee Jae-myung recently stepped in to stress the need for debt relief, the Financial Services Commission appears to be drawing up measures to encourage participation by granting incentives (benefits) along with penalties (disadvantages).
According to financial authorities on the 10th, the Financial Services Commission (FSC) is currently devising an incentive and penalty plan for the New Leap Fund to apply to lending companies. The Financial Services Commission aims to finalize related discussions this month with the Korea Asset Management Corporation (KAMCO) and the lending industry, then announce the final plan.
The New Leap Fund is a program jointly promoted by the Financial Services Commission (FSC) and KAMCO to help long-term borrowers in arrears make a fresh start. Backed by a total fund of 840 billion won, the New Leap Fund is purchasing and extinguishing unsecured arrears claims of 50 million won or less that are at least seven years old and held by financial institutions.
For the lending sector, where collecting and selling arrears claims are key revenue sources, handing over arrears claims to the government would inevitably reduce sales. While the government's average purchase price for New Leap Fund arrears claims is around 5% of face value, they trade at about 20% in the market. For example, a 1 million won claim can sell for 200,000 won in the market, but would be transferred to the government for only 50,000 won.
On the 15th, during a Financial Services Commission (FSC) briefing last month, President Lee Jae-myung said, "If someone has debt but lacks the ability to repay, declaring bankruptcy and discharging the debt to let them start over helps society. Calling it moral hazard is irresponsible agitation," urging swift resolution of long-term arrears claims.
The lending industry is pushing back against the plan to impose penalties. The Financial Services Commission (FSC) is currently pursuing an amendment to the lending business act to convert the registration-based purchased-claim collection business into a licensing system. If the bill takes effect, lending companies that fail to meet strict standards—such as 50% investment by financial firms and capital of at least 3 billion won—will be barred from operating collection businesses.
A source in the lending industry said, "A bill that acts as a penalty is already being pushed under the lending business act, so adding New Leap Fund penalties on top of that is excessive."