SEOUL, March 25 (Xinhua) -- South Korea planned to launch credit recovery fund for debtors this week amid concerns that massive household debts may cripple consumer spending and economic recovery, the financial regulator said Monday.
Kookmin Hangbok Giguem, or national happy fund in English, worth 1.5 trillion won (1.35 billion U.S. dollars) will be set up on Friday to help household defaulters restore credit through debt restructuring such as write-offs and the lengthening of debt repayment, according to the Financial Services Commission (FSC).
People with debts overdue more than six months of less than 100 million won (10,000 U.S. dollars) can apply to the fund for debt restructuring. Borrowers of high-rate loan from non-bank institutions can transfer their loans to those of interest rate of around 10 percent.
The credit repair fund will buy debts in delinquency with the seed money of around 800 billion won that will be raised through borrowing and subordinated bond issuance. About 500 billion won will be transferred to the fund from the existing, state-run fund for debt restructuring.
The remaining 700 billion won, which will be used to transform high-rate loans to low-rate ones, can be offset by the reimbursement of delinquent debts and the profits of guarantee commission.
The number of around 210,000 with overdue debts, which account for 16 percent of the total delinquent debtors, was estimated to benefit from the credit recovery fund, the regulator said.
The planned fund was feared to entice debtors to delay repayment with the intention of benefiting from debt write-offs. Reflecting the concern, debtors in the early-overdue period were increasingly applying for the debt restructuring program.
Applicants for the so-called "free workout program," targeting debtors who failed to repay debts for less than 90 days, took up 24.6 percent of the total in the fourth quarter of last year, almost tripling the figures for 2009 and 2010.
This reflected spreading recognition among South Korean debtors that if they wait for a short time, they would benefit from the upcoming credit-recovery program, discouraging debtors from repaying debts sincerely.
The ratio of loans overdue more than one day was 0.81 percent of the total household loans by banks as of the end of 2012, the highest since 2009 and more than doubling over the past three years, according to the Financial Supervisory Service (FSS). The rate of delinquent loans overdue more than 90 days was 0.69 percent as of end-2012.
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