PPP lawmaker warns of moral hazard, calls for reform

Credit card loan advertisements posted on a utility pole in Myeong-dong, Jung-gu, Seoul [Newsis]
Credit card loan advertisements posted on a utility pole in Myeong-dong, Jung-gu, Seoul [Newsis]

Borrowers enrolled in the New Start Fund, a debt-restructuring program for small-business owners and the self-employed, receive average principal relief nearly seven times greater than the overdue interest they owe, new data shows.

People Power Party lawmaker Park Jun-tae of the National Assembly's Political Affairs Committee obtained the data from the Korea Asset Management Corp. (Kamco). It shows the average principal reduction rate under the fund's purchase-type debt restructuring stood at 74 percent as of the end of August.

The average principal debt per borrower was 91.5 million won ($68,300), of which an average of 67.7 million won was forgiven at the time of the agreement. The average overdue period from the initial default to the signing of the agreement was about 10.9 months, during which borrowers accumulated an estimated average of about 10.3 million won in overdue interest.

That means the average principal forgiven — 67.7 million won — was about 6.6 times the interest burden incurred through delinquency, roughly 10.3 million won.

The New Start Fund, launched in 2022, does not reduce principal for borrowers at risk of default with fewer than 20 days of delinquency. Principal forgiveness through purchase-type debt restructuring is available only to borrowers who have been delinquent for 90 days or more.

The program's scale has grown each year. Last year's second supplementary budget added 700 billion won to the fund, and eligibility was extended to cover those who operated businesses through June 2025, up from the previous cutoff of November 2024. For low-income delinquent borrowers with total debt of 100 million won or less, the maximum principal reduction rate was raised from 80 percent to 90 percent, and the maximum repayment period was extended from 10 years to 20 years.

The number of cases flagged for review as intentional defaults is also rising. Kamco data shows that the number of such cases stood at 92 in 2023, 196 in 2024 and 339 in 2025, and had already reached 362 as of August this year, surpassing last year's full-year total.

Kamco said the increase may partly reflect a more aggressive screening posture, including a new review this year of whether applicants hold virtual assets or unlisted shares. The agency said that even when borrowers apply for purchase-type debt restructuring under the New Start Fund, relief is granted selectively after review, and anyone found to have defaulted intentionally during the moral-hazard screening is disqualified from the program.

"Principal relief is provided for the portion of debt that a borrower has no capacity to repay," a Kamco official said. "The New Start Fund is designed to reduce debt and help small-business owners and the self-employed get back on their feet, so it applies debt restructuring more broadly than standard programs."

Park said the current structure risks serious moral hazard. "A system in which people who have faithfully repaid their debts are put at a disadvantage can cause serious moral hazard," he said. "Rather than touting debt forgiveness financed by taxpayer money, the Lee Jae-myung administration should first fix the fairness of the system so that diligent repayers are not subject to reverse discrimination."


yjsung@heraldcorp.com