South Korea’s ‘Bad Bank’ plan Sparks Debate Over Debt relief

SEOUL – The South Korean government’s initiative to create a “bad bank” to alleviate the burden on individuals struggling with loan repayments is generating both support and skepticism. Announced on June 23, 2025, the plan aims to address rising debt levels, particularly among small business owners impacted by economic challenges. While some see it as a crucial safety net, others worry about the potential for moral hazard and increased financial strain on the nation’s economy. The proposed bad bank is reminiscent of similar strategies employed during past economic downturns, including the 1997 Asian financial Crisis, when non-performing loans threatened the stability of the financial system [[1].

Understanding the ‘Bad Bank’ Concept

A “bad bank” is a specialized financial entity designed to acquire and manage non-performing assets, or “bad loans,” from existing lenders. Unlike traditional banks, its primary function is not to provide loans but to rehabilitate distressed debt. These entities purchase loans at a fraction of their original value, offering flexible repayment options tailored to the debtor’s financial capacity. In many instances, this involves forgiving a portion of the principal amount owed.

Did You Know? The concept of a “bad bank” gained prominence following the 2008 financial crisis as governments worldwide sought ways to stabilize their banking systems.

South korea’s Bad Bank: A Detailed Look

The Financial Services Commission (FSC) recently unveiled details of the proposed bad bank alongside the declaration of a new supplementary budget. The entity will operate as a corporation under the Korea Asset Management Corporation (KAMCO), a state-run agency with experience in managing policy financing initiatives. The primary goal is to provide debt relief to vulnerable individuals and small business owners who are at least seven years overdue on unsecured loans up to 50 million won (approximately $36,400 USD). This initiative directly addresses concerns about household debt, which reached a record high of ₩1,862.1 trillion (USD $1.4 trillion) in the first quarter of 2022 [[2].

After acquiring these delinquent loans, the bad bank will assess each debtor’s financial situation to determine whether to write off the debt entirely or restructure it. Borrowers earning less than 60% of the median income, possessing no disposable assets, and deemed incapable of repayment will have their debts fully forgiven. Others considered unlikely to repay may see up to 80% of their principal reduced,with the remaining balance repayable over a 10-year period.

Pro Tip: Debt restructuring can considerably improve a borrower’s credit score, making it easier to access financial services in the future.

Key Metrics of the Program

The government estimates that the program will target non-performing loans totaling 16.4 trillion won, possibly benefiting around 1.13 million individuals. The government will allocate 400 billion won from the supplementary budget, with an additional 400 billion won expected from private financial institutions, including commercial banks.

Diverging Perspectives on the Bad Bank

Experts hold differing views on the potential impact of the bad bank. Some believe it will create a vital social safety net, reduce financial strain on vulnerable populations, and stimulate private consumption, ultimately contributing to a healthier financial system. Credit finance companies, such as credit card issuers and installment financing firms, are expected to benefit from the program, as the sale of distressed assets would improve their financial standing.

However, the initiative may place a burden on private financial institutions, which are expected to contribute a total of 400 billion won. While an FSC official stated that the regulator had reached a “mutual consensus” with the sector regarding the scale of contributions, some in the banking industry suggest this consensus may not be entirely voluntary. This echoes concerns raised in 2023 when banks contributed 2 trillion won to a similar initiative amid regulatory pressure.

“As a licensed business, it is difficult for a bank to reject a request made by the regulator,” said an official at a local commercial bank.

Potential Challenges and Considerations

One potential challenge is ensuring that the debt relief program is effectively targeted and does not create a moral hazard, where individuals take on excessive debt knowing that it may be forgiven. Careful assessment of borrowers’ financial situations is crucial to prevent abuse and ensure that the program benefits those who genuinely need assistance.

What are the long-term implications of such a program on South Korea’s financial culture? how can the government ensure responsible lending practices in the future?

Disclaimer: this article provides general facts and should not be considered financial advice. Consult with a qualified financial advisor for personalized guidance.

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