The government said it will buy and restructure billions of won in long-delinquent debt, expand cheap refinancing for small merchants and increase subsidized lending to low- and middle-credit borrowers after the BOK lifted its base rate to a 19-month high of 3.00 percent on Thursday.
The 25-basis-point increase followed an identical hike in July, marking the first back-to-back tightening since January 2023.
Deputy Prime Minister and Finance Minister Koo Yun-cheol announced the measures at an emergency economic meeting in Seoul, saying the government would provide heavier protection for young people, lower-income households, small merchants and small and midsize companies.
The government explicitly cited the BOK's latest rate increase and rising market rates as reasons for the package, warning that higher benchmark and bank funding costs are likely to feed progressively into loan rates as borrowers reach their repricing dates.
The concern is amplified by Korea's exceptional debt load. Household credit reached a record 2,019.8 trillion won ($1.5 trillion) at the end of June after increasing 25.9 trillion won in the second quarter. The buildup gives the BOK another reason to tighten but also leaves the economy unusually exposed to higher borrowing costs.
The pressure is more severe among the self-employed. Outstanding loans to self-employed borrowers reached a record 1,095.5 trillion won at the end of March, while delinquent debt climbed to 22.3 trillion won.
Among vulnerable self-employed borrowers — people with multiple loans who are also low-income or low-credit — the delinquency rate reached 12.7 percent in the first quarter, compared with an average 5.3 percent in 2021, according to the government's policy document. The delinquency rate among vulnerable household borrowers stood at 10.9 percent.
The BOK has estimated that a 25-basis-point rise in lending rates would add about 1.8 trillion won to the self-employed sector's annual interest bill.
The government's first line of defense is to remove or restructure debt that has little realistic prospect of being repaid.
A nationwide review in June identified 1.1 trillion won of loans held by securitization companies that have been delinquent for at least seven years and carry balances of 50 million won or less. Money lenders hold as much as another 4.5 trillion won of such debt.
The government plans to purchase as much of the combined 5.6 trillion won pool as possible through the New Leap Fund in the second half of this year, then write off debts of borrowers with no repayment capacity or restructure them for those capable of partial repayment.
A separate debt workout will target loans extended to sole proprietors during the pandemic.
Banks and policy lenders supplied 358.7 trillion won of personal-business loans between 2020 and 2023, of which 154.7 trillion won, or 43.1 percent, remains outstanding. About 4.1 percent has been delinquent for at least three months.
Government officials estimate that could leave roughly 6 trillion to 7 trillion won potentially subject to restructuring, although final eligibility and the scale of write-offs have not been determined.
A detailed program is expected in the fourth quarter ahead of implementation next year.
Public financial institutions will separately clean up loans delinquent for more than 20 years where recovery is deemed virtually impossible. The Export-Import Bank of Korea will write off 16.2 billion won of long-unpaid special claims against smaller companies this year, together with related debts of joint guarantors.
The government said write-offs will not be automatic solely because of the age of the debt. Repayment capacity and prospects for recovery will be reviewed in an effort to limit moral hazard and resentment among borrowers who have continued servicing their loans.
For borrowers still capable of repayment, Seoul is trying to prevent the BOK's higher policy rate from flowing fully into their financing costs.
The BOK will keep the interest rate on its Bank Intermediated Lending Support Facility at 1.25 percent despite Thursday's base-rate increase and plans to redesign the program next year to provide greater support to regional SMEs and sole proprietors.
The government is also widening a refinancing program run by the Korea SMEs and Startups Agency that allows small merchants to replace loans carrying interest rates of at least 7 percent with borrowing at 4.5 percent.
Eligibility will be expanded from loans approved before June 30, 2025, to those approved by the end of that year.
Industrial Bank of Korea will double its "Hope Dream" lending for small merchants facing business difficulties to 3 trillion won this year from 1.5 trillion won. Eligible borrowers who have maintained repayments can receive interest-rate discounts of as much as 1.8 percentage points.
Korea Development Bank will increase its rate-conversion facility to 1.5 trillion won next year from 1 trillion won this year, while policy interest subsidies for SMEs will also be expanded.
The approach effectively seeks to separate borrowers according to their ability to survive higher rates: bad debt is restructured, viable but vulnerable borrowers receive cheaper refinancing, while borrowers with sufficient capacity continue to face the tighter rates intended by the BOK.
The government will also expand its subsidized lending programs for lower-credit households.
Annual supply through the Sunshine Loan program will increase by 300 billion won to 6.2 trillion won in 2027 from 5.9 trillion won this year.
A new loan for lower- and middle-credit borrowers will offer up to 1 million won at an annual rate of 4.5 percent with a maturity of 10 years, while the ceiling on youth microfinance loans will double to 10 million won from 5 million won. Eligibility will also be expanded to some borrowers in the bottom half of the credit-score distribution with annual income of 35 million won or less.
Banks will be encouraged to introduce mortgages carrying fully fixed interest rates for at least 10 years in the second half of this year. The government is considering a separate policy mortgage next year for young first-time buyers purchasing non-apartment homes worth 400 million won or less, with loan-to-value ratios of up to 80 percent.
AJP Takeaways
- Seoul is responding to the BOK's back-to-back hikes with targeted debt relief and cheap refinancing rather than broad stimulus, allowing monetary tightening to continue while cushioning its weakest borrowers.
- Up to 5.6 trillion won of seven-year-plus delinquent debt held by securitization companies and money lenders could be purchased for write-off or restructuring, with a separate program planned for pandemic-era small-business loans.
- Small merchants with loans costing at least 7 percent can refinance at 4.5 percent, while subsidized SME lending and Sunshine Loan supply will be expanded.
- The package exposes the central policy tension of a 3 percent rate environment: the BOK wants tighter credit to restrain inflation and debt, while Seoul is trying to prevent that tightening from turning existing financial weakness into a wave of defaults.
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