The new Moon Jae-in administration’s financial policies are starting to take shape. After the State Affairs Planning Advisory Committee began framing out policies and state affairs last week, the new administration’s financial policies have been gaining attention. We will take a closer look at how the Moon administration will tackle the current issues that Korea’s financial sector faces with Lee In-chul, the head of Chamjoeun Economics Research Institute. Let’s first take a look at the Financial Services Commission’s report.
We can summarize the Financial Services Commission’s report into three different issues. The most urgent issue is policies to tackle rising household debt. As of the first quarter of this year, household debt has almost reached 1,360 trillion won. So, the report discusses how to manage rising household debt. The second issue deals with debt remission for people who do not have the ability to pay off their loans. The FSC has already begun reviewing who will be eligible for debt remission and remission methods. The third issue is on support for self-employed small business owners and small to medium-sized businesses. The plans call for the protection of consumers by lowering credit card fees for small business owners and lowering the maximum interest rates that can be legally charged by loan sharks.
The Park Geun-hye administration focused on nurturing Fintech, which brings together finance and information technology. However, President Moon Jae-in emphasized small-loan finances and support for financially vulnerable people even during his days as a presidential candidate. As such, the new government is prioritizing managing household debt and strengthening small loan finances. On May 25th, the State Affairs Planning Advisory Committee announced the “3X Comeback Support Fund” and promised to abolish joint liability on loans for startups.
In order to promote business startups, the government will run the “3X Comeback Support Fund” starting from next year. This fund will provide venture startups with advanced technology or skills to restart their business after they’ve failed. The target is startups which have been established within the last 7 years, and the fund will raise 150 billion won from state coffers and 150 billion won from private funds. Another hurdle for startups and entrepreneurs to restart their failed business is joint liability on loans. The government has also decided to completely abolish this system for ventures which have been set up within the last 7 years.
Government support measures for startups until now were mostly focused on entrepreneurs preparing to start their business. The Moon administration plans on abolishing venture startups’ joint liability on guarantees in phases and give them another chance at their business even if they’ve failed in order to create a business startup boom. The government plans on actively nurturing startups to see another venture boom in the nation last seen during the Kim Dae-jung administration. Meanwhile, management of household debt will be strengthened under the Moon administration.
The government will announce strengthened measures for managing household debt next month. The new administration plans on lowering the disposable income to household debt ratio to within 150% in accordance with its motto, “income driven growth.” In other words, it wants to increase income and decrease debt to naturally manage the total amount of household debt. Simply put, consumers will not be able to get additional loans if their income does not increase and if their principal interest and interest rates are high. So, how will household debts be managed? The government plans to use the Debt Service Ratio (DSR) not only at banks but at secondary financial institutions. Using the DSR means lenders will take into account the principal and interest of all loans in the financial sector, which includes not just mortgage loans, but also credit loans and vehicle installment financing among others. This has the effect of reducing the credit line more than the existing debt repayment rate.
As of the first quarter of this year, the nation’s household debt amounted to nearly 1,360 trillion won. The amount is threatening Korea’s economy as it increases the burden on borrowers and delays consumption recovery. In order to solve this problem, the Moon administration is expected to limit the total amount of household debt to 150% of disposable income. Also the Debt Service Ratio, which calculates the repayment rate of the total debt principal repayment ratio, will be expanded to all financial sectors. However, this could make borrowing more difficult for ordinary people with low credit ratings, driving them to loan sharks or the underground loan market. The new government’s loan remittance program is also stirring controversy.
A lot of controversy surrounds the issue of cancelling debt for borrowers who have been delinquent for long periods and have borrowed small amounts. The new government says it should cancel debts for those who have debts under 10 million won and have been delinquent for over 10 years, including those who borrowed from loan sharks. It is promoting the move in an effort to help the socially vulnerable. Statistics show that around 1.2 million people with a total debt of around 4.5 trillion won would be eligible for debt cancellation. The government says 800,000 out of the 1.2 million have partially paid back their loans, but 400,000 are unable to pay back their loans and have given up altogether. That is why they are thinking about canceling their debt. However, in the past when a new government took power, similar debt remittance programs were put in place, but none proved to be effective. Some even argue that these programs cause problems as people start to believe it’s okay not to repay their loans because in time, someone else will. That is why the success of this plan will lie in how these negative effects are minimized and the government’s standards in selecting long-term small-amount debt delinquents.
During the presidential campaign, President Moon Jae-in presented one of the strongest measures on debt remittance, which includes people who have had debts under 10 million won for over 10 years. However, if the government loosens its grip on debt for normal financial activities, it also brings to question whether it is a fair move for other debt holders who are faithfully paying back their debt. That is why many point out that the policy would require long-term measures.
A supplementary budget for job creation and debt remittance for long-term debt holders have something in common. They both require use of the national budget. That is why experts point out the need to look at diverse methods to help the livelihoods of ordinary people or get to the root of the problem. They are saying that creating a social structure where a consumer who borrows money can earn enough money to pay it back will be the most ideal solution. Experts also point out that the government must consider the nation’s financial soundness when deciding on policy priorities, carrying out the urgent ones first and revising others, even if they were campaign pledges. What we need to remember is that the government is not here to just make sure it is fulfilling empty pledges, or making sure that the numbers match. It must prioritize pledges that are sustainable.
The Moon Jae-in administration’s financial policies will be focused on finances for ordinary people and protecting consumers for the next five years. In order for these policies to bear fruit, the administration should look far and wide while embracing different views.