The government will purchase long-term delinquent loans held by asset management companies and lenders through the New Leap Fund. In anticipation of increased repayment burdens for vulnerable borrowers due to rising interest rates, the government plans to convert high-interest loans for small businesses to a 4.5% interest rate and expand the supply of the Sunshine Loan.
On the morning of August 28, at the Seoul Government Complex, Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol chaired an emergency economic meeting, where he announced the "Support Plan for Vulnerable Borrowers in Response to Rising Interest Rates."
A comprehensive survey conducted in June revealed that the total amount of long-term delinquent loans, defined as loans overdue for more than seven years and under 50 million won, is estimated at 11 trillion won from asset management companies and up to 45 trillion won from lenders. The government plans to purchase as much of the 56 trillion won in targeted loans as possible through the New Leap Fund, aiming to either write off or restructure these debts in the second half of this year.
Additionally, the government will pursue separate debt restructuring for personal business loans issued during the COVID-19 pandemic. Of the 358.7 trillion won in personal business loans provided by banks and policy financing institutions from 2020 to 2023, 154.7 trillion won (43.1%) remains unpaid.
A Ministry of Economy and Finance official stated in a pre-briefing that the ratio of loans overdue for more than three months among unpaid loans is about 4%, estimating the total amount eligible for debt restructuring to be between 6 trillion and 7 trillion won. However, this figure is separate from the 56 trillion won in long-term delinquent loans held by asset management companies and lenders.
The specific details regarding the loans to be written off or restructured, as well as the number of beneficiaries, have yet to be finalized. Loans from borrowers who have lost repayment ability will be purchased and written off, while options such as principal reductions or extended repayment periods will be considered for those with some repayment capacity.
A detailed debt restructuring program is expected to be announced in the fourth quarter of this year. The government explained that to implement the program next year, it must determine the beneficiaries and support methods before the National Assembly finalizes the budget for the upcoming year.
Long-term delinquent loans held by financial public institutions for over 20 years will be collectively written off in the second half of this year. The Ministry of Economy and Finance has determined that the likelihood of repayment for these loans is virtually nonexistent and that they hinder the normal financial activities of the borrowers. The Export-Import Bank plans to write off 16.2 billion won in long-term unpaid special bonds for small and medium-sized enterprises this year, along with the debts of guarantors such as CEOs.
However, it was noted that the resolution of long-term delinquent loans over 20 years does not constitute a significant portion of the overall measures. The government plans to assess the repayment ability and recovery potential of borrowers rather than mechanically writing off loans based solely on the duration of delinquency.
Measures will also be put in place to mitigate moral hazard and the sense of deprivation among diligent repayers due to debt forgiveness. Programs linking employment and rehabilitation will be provided for borrowers who undergo debt restructuring, while incentives will be expanded for diligent repayers in terms of interest rates and loan limits.
A Ministry of Economy and Finance official stated, "Based on our experience with the New Start Fund, there have been very few cases of individuals intentionally defaulting on their debts to receive forgiveness. We also plan to provide incentives for those who transition to wage employment rather than re-establishing businesses in the same industry after debt restructuring."
Despite the increase in the benchmark interest rate, the Bank of Korea has decided to keep the interest rate for financial intermediary support loans at 1.25%. This program allows the Bank of Korea to supply funds to financial institutions at lower rates to reduce loan rates for small and medium-sized enterprises, with a total limit of 30 trillion won.
To facilitate this, the Bank of Korea plans to expand the supply of financial intermediary support loans to local small and medium-sized enterprises and personal businesses starting next year.
The Small Enterprise and Market Promotion Agency will expand the target for converting high-interest loans above 7% to 4.5% loans, extending the approval period from loans approved before the end of June 2025 to those approved before the end of December 2025.
The scale of the "Hope Dream Loan" provided by Industrial Bank will double from 1.5 trillion won this year to 3 trillion won. The limit for the Industrial Bank's interest rate conversion support fund will increase from 1 trillion won this year to 1.5 trillion won next year. The policy fund supply scale from the Small and Medium Venture Business Promotion Agency will increase from 360 billion won this year to approximately three times that amount next year.
Support for low-income finance will also be expanded. The annual supply scale of the Sunshine Loan's general and special guarantees will increase from 5.9 trillion won this year to 6.2 trillion won next year, an increase of 300 billion won. A new small loan program offering 1 million won at a 4.5% interest rate with a 10-year maturity will be launched next year for individuals with low to moderate credit scores.
The loan limit for youth-targeted microfinance will be raised from 5 million won to 10 million won. Young individuals with an annual income of 35 million won or less and in the bottom 50% of credit scores will also be included in the new support target.
A policy mortgage allowing young individuals without homes to purchase non-apartment housing under 400 million won with low interest rates and an 80% loan-to-value ratio will be considered for launch next year. Banks will also be encouraged to introduce pure fixed-rate mortgage products with a term of over 10 years.
A Ministry of Economy and Finance official stated, "This plan was not specifically designed based on a benchmark interest rate of 3.0%. It is a support measure prepared by relevant departments over the past two to three months in anticipation of the possibility of further interest rate increases and the overall trend of rising rates."
* This article has been translated by AI.
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