FSC to wipe 25.7 trillion won worth of debt

Korea’s financial regulatory agency said Monday that it would cancel some 25.7 trillion won ($22.9 billion) worth of bonds that have passed their maturity date.

The move, set to go into motion by the end of the year, will free about 2.1 million debtors from collection agencies and clear their records of delayed payments.

About 21.7 trillion won is owed to the government, and 4 trillion won to private lenders, excluding loan sharks.

The decision was made during a meeting between the Financial Services Commission and financial institutions on Monday. Choi Jong-ku, the commission’s chairman, said the agency plans to set new guidelines for extinguishing debt.

In the past, each individual institution made its own decision on whether to clear expired debt. This is the first time all of them have decided to wipe them at once.

This means borrowers will not be obligated to pay back bonds whose maturity date has passed. Maturity in Korea is normally set at five years, after which lenders have another five years to collect on debt.

However, financial institutions often file lawsuits against borrowers to get another five years to collect, which brings the total maturity period to 15 years.

To avoid canceling bad debt, some financial institutions also offer to restructure debt if borrowers pay back a certain amount.

An official from the Financial Services Commission said financial institutions should not face any burdens from the new policy because they have already written off the bad debt in their account books.

Still, the latest move raises concerns about moral hazard and financial institutions’ right as creditors to collect on money they lend.

The Financial Services Commission countered the policy will not result in moral hazard because the wiped debt is money that borrowers already don’t have an obligation to pay back. But it did acknowledge concerns about borrowers intentionally disappearing in order to avoid paying their debt.

Meanwhile, some banks have resorted to selling their bad debt to loan sharks or collection agencies.

The Financial Services Commission said it has heard public calls to toughen regulations on such activities. A bill to revise laws on reselling and collecting bad debt is being discussed in the National Assembly.

BY KIM YOUNG-NAM [kim.youngnam@joongang.co.kr]