The government will buy and write off a large amount of long-term arrears bonds and support debt workouts to help vulnerable borrowers whose repayment burden will grow as the Bank of Korea raises the base rate. Among arrears bonds of 50 million won or less and in arrears for seven years or longer held by securitization companies and lend companies, up to 5.6 trillion won are under review for purchase. Long-term arrears bonds of 20 years or longer held by financial public institutions will also be written off in bulk. The supply of Sunshine Loans will increase, and a new low-interest loan at an annual 4.5% with a 10-year maturity will be introduced.
On the 28th, the government held a meeting of the Emergency Economic Headquarters and ministers related to the economy and prepared these measures to support vulnerable borrowers in a period of rising interest rates. To reduce the debt burden on vulnerable borrowers due to rising interest rates, the government decided to promote: ▲ activation of debt workouts ▲ expanded support for small and midsize enterprises and microbusiness owners ▲ stronger support for inclusive finance.
Based on a full survey conducted in June, the government plans for the New Leap Fund to purchase as much as possible and write off, or adjust the debt of, arrears bonds of 50 million won or less and in arrears for seven years or longer held by securitization companies and lend companies. The surveyed volume of long-term arrears bonds totals 5.6 trillion won, including 1.1 trillion won at securitization companies and up to 4.5 trillion won at lend companies.
Separate debt workouts for self-employed people and microbusiness owners who struggled during COVID-19 will also begin next year. The plan is not only to reduce principal, but to support step by step through debt workout, credit recovery, and restoration of business capacity. First, long-term arrears bonds of 20 years or longer held by financial public institutions will be written off in bulk in the second half of this year. For debts with no repayment capacity, creditors will strengthen management by allowing statutes of limitations to run, among other steps. The Export-Import Bank of Korea will, for the first time this year, write off in bulk 16.2 billion won in special long-term non-repaid bonds held against small and midsize enterprises, and will also eliminate the debts of joint guarantors such as chief executive officers.
The government unveiled these measures because debt that swelled during COVID-19 still remains to a large extent, and interest rates are rising again. During the COVID-19 period (2020–2023), banks and policy finance institutions supplied 358.7 trillion won in loans to sole proprietors. Of that, 154.7 trillion won (43.1%) has not yet been repaid. The rate of long-term arrears of three months or more is around 4.1%.
Arrears rates are also rising. The arrears rate on bank loans to small and midsize enterprises doubled from an average 0.4% in 2021 to 0.8% in June this year. The arrears rate on loans to sole proprietors also rose from 0.2% to 0.7% over the same period. Among "vulnerable borrowers," defined as multi-debtors who are low income or low credit, the arrears rate across all financial sectors jumped for the self-employed from an average 5.3% in 2021 to 12.7% in the first quarter of this year, and for households from 6.8% to 10.9%.
The government expects that if rates rise further, the burden will grow mainly for household vulnerable borrowers with a high share of variable-rate unsecured loans and for small and midsize enterprises that rely heavily on loans from financial companies.
Support will also be expanded for small and midsize enterprises and microbusiness owners who are faithfully repaying their debts. The preferential cut to guarantee fees under the Korea Credit Guarantee Fund (KODIT)'s "Step-up special guarantee for microbusiness owners" will be widened from 0.3 percentage point to 0.4 percentage point in September. The Export-Import Bank of Korea will introduce an interest reduction program that applies rates below funding costs when companies under restructuring repay their debt without arrears.
Barriers to refinancing high-interest loans will also be lowered. The refinancing loan run by the Small Enterprise and Market Service is a product that converts loans of 7% or higher to a 4.5% loan. Previously, only loans approved through June 30 last year were eligible, but eligibility will expand to loans approved through Dec. 31 last year. The loan limit for Smile Microcredit loans for young adults will rise from within 5 million won to within 10 million won, and eligibility will expand to include young adults with personal credit scores in the bottom 50% and annual income of 35 million won or less.
Fixed-rate mortgage loans will also be expanded to reduce interest rate volatility risks. The government will guide banks to offer pure long-term fixed-rate mortgage loans of 10 years or longer starting in the second half of this year. Next year, a so-called "buy a home with monthly rent" policy mortgage will be newly launched for young adults without homes. The plan targets non-apartment homes priced at 400 million won or less, applying a low interest rate and a loan-to-value (LTV) ratio of up to 80%.
Credit evaluation methods will also change. In December, the government will overhaul the personal credit evaluation system so that not only arrears history but also the degree of credit recovery and future growth potential can be reflected in loan screening. For microbusiness owners, banks will adopt a specialized credit scoring model (SCB) that uses nonfinancial information such as sales, industry, and commercial district to evaluate growth and potential. If the result falls into the upper grades, credit ratings will be raised with preferential treatment in interest rates or loan limits.