Gov't should elaborate on debt restructuring details
The government's program to write off up to 90 percent of the principal for borrowers hit by the COVID-19 pandemic is squeaking even before it starts. According to the debt-rescheduling plan, debtors become "potential bad borrowers" if their repayments are 10 days overdue, resulting in having their interest on arrears reduced or exempted and benefitting from lower lending rates. But if the overdue period exceeds 90 days, they become "bad borrowers" and get 60-90 percent of the principal written off.
However, the banking community noted that excessive debt forgiveness could lead to many bad borrowers and induce moral laxity. They also proposed that the government tighten the criteria for potential bad borrowers to those who delay repayment for 30 days and reduce the scope of debt cancellation to only 10-50 percent of the principal. The Seoul Metropolitan Government also pointed out that excessive debt cancellation could lead to the insolvency of the Local Credit Guarantee Foundation under its wing.
The Yoon Suk-yeol administration's plan to cancel 60-90 percent of the principal is greater than the extent of past cancellations, the upper limits of which did not exceed 50 percent. If the government pushes its plan, it could make borrowers who pay off all their debts feel wronged. The administration is right to try to help numerous self-employed people and micro businesses reeling from the pandemic's economic fallout. However, it should not fool those who have faithfully paid their debts while preventing possible insolvencies of lending institutions.
All this shows why the government should elaborate on the details of its debt restructuring plan to prevent moral laxity and provide adequate explanations to borrowers who have the means to pay back their debts so that they do not feel relative deprivation. It is desirable in this regard that policymakers limit the targets of writing off 90 percent of the principal to those who are financially vulnerable, such as severely physically challenged people, those aged over 70, and those who receive public assistance. Such targeted debt forgiveness will make banks' negative reactions to the debt restructuring program all the more incomprehensible. Banks, the biggest beneficiaries of the ongoing economic crisis amid households' snowballing debt and the sharp interest rate hikes, should share the pain.