By Kim Soo-yeon
SEOUL, March 19 (Yonhap) -- An envisioned state-run debt rescheduling fund underscores the government's firm will to cope with mounting household debt, but it also raises the specter of moral hazard as some heavy borrowers seek to get a free ride, analysts said Tuesday.
The financial regulator is set to launch the debt-rescheduling fund, dubbed as the "People's Happiness Fund," with an initial capital of 870 billion won (US$785.1 million) as early as the end of March as part of President Park Geun-hye's key campaign pledge to tackle the debt problem.
The fund, which is scheduled to eventually grow to 18 trillion won, will buy overdue debts held by local banks and other non-bank institutions that are worth less than a combined 100 million won and at least more than six months in delinquency.
"The notion of financial inclusion has been in the spotlight globally," Shin Je-yoon, the nominee for chairman of the Financial Services Commission (FSC), said at a confirmation hearing on Monday. "I will do my best in a bid to help the marginalized stand on their own feet via the fund."
The move came as South Korea's high household debt is feared to spawn massive defaults because the local economy is slowing down. Korea's household debt reached a record 959.4 trillion won as of end-2012, data by the central bank showed.
Households' high indebtedness is unnerving policymakers as it could further sap consumer spending, hurting economic growth.
Korea's household debt has grown at an annual average of some 9 percent since 2005 on the back of banks' excessive competition for extending home lending and a long-standing belief that investment in the property market never fails.
Since the growth rate peaked at 11.8 percent in 2006, it has largely slowed. The yearly growth of the household debt dropped to a nine-year low of 5.2 percent in 2012 from 8.1 percent in the previous year, the data showed.
But the quality of such debt has turned worse as the portion of households borrowing from multiple financial firms and that of people with low creditworthiness have been on the rise.
The number of registered borrowers who are delinquent over three months is estimated to have reached around 1.24 million as of the end of January and their combined debt totaled around 157.8 trillion won, according to data compiled by a bank association.
Out of such debtors, borrowers whose debt is in arrears by over six months accounted for nearly 91 percent with total debt of about 136.8 trillion won.
Mindful of such risks on the economic growth, Korea is poised to launch the fund, which the FSC estimated will be able to write off around 50 to 70 percent of the principal and handle overdue debt worth 22 trillion won at most.
The government is also mulling salvaging troubled mortgage borrowers, dubbed as "the house poor," who bought homes with borrowed money during the 2005-2006 housing market boom, but now face high debt-servicing burdens due to falling housing prices.
But experts said that the fund could have unintended side effects by making some heavy borrowers believe that the government is always ready to rescue them with tax payers' money, hurting market principles.
"A recent rise in applicants for the existing free workout program sparks concerns about moral hazard as they tap the scheme without making efforts to repay the debt," Cho Young-moo, a senior research fellow at the LG Economic Research Institute, said in a report.
The free workout program is a debt-rescheduling scheme for borrowers whose debt is less than three months behind payment.
The report said that Korea had an experience of seeing some debtors show serious moral hazard behaviors in 2003 when a credit card bubble burst.
Then, the government drew up a set of measures to rescue delinquents suffering from credit card debts, but credit card firms' loan delinquency ratio jumped to 14.1 percent as of end-2003 from 6.6 percent at the end of 2002, it said.
"The government should carefully select debtors eligible for the happiness fund in order not to discriminate against borrowers with good faith," said Jeong Young-sik, an economist at the Samsung Economic Research Institute.
"The government also needs to swiftly launch the debt-scheduling fund and operate it in the short term to prevent cases of moral hazard."
Cho added that borrowers' moral hazard could aggravate the household debt problems and have risks of raising necessary funds to support debt-ridden households, necessitating the government's efforts to stem the spread of such behaviors.
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