Casualties of Debt Bubble Seek Lifeline
by Kim Ji-Ho
Korea Herald
April 7, 2004Defaulters tell woes to credit counselors, apply for 'bad bank' programs
An economic downturn has always been good news to Park Il-sim, as hard times lured more people to visit the fortuneteller. But until a few months ago, she had never gazed into so severe a slump and seen herself.
"Things got really tough last year. People seemed to think even fortune telling fees were a kind of extravagance," says the 51-year-old mother of two.
Clients to the seer's place in Suncheon, South Jeolla Province, dwindled. Even discounts failed to generate more visits. Park had little choice but to borrow again and again.
Then came harassment by loan collectors, who pressured not only Park but also her relatives and friends, who had stood as debt guarantors.
At the end of February, 2.5 million people were credit card defaulters, consumers who were at least three months behind on their accounts. Their burdens do not stop there. Cultural values pressure friends and relatives to help the debtors, retarding their spending as well.
The result has put the Korean economy on two tracks: surging sales abroad and fragile demand at home. Anxious to end despair and reawaken domestic spending, officials have created debt workout programs, but the harsh reality is many debtors may not qualify for assistance.
'Only hope'
Park was one of the lucky ones.
After defaulting on about 60 million won ($52,000), which put her on the blacklist of the country's main financial association, she finally visited the Credit Counseling and Recovery Service in February.
"It was my last and only hope," sighs Park, one of 106,300 delinquents who reached a similarly miserable finale before applying for the agency's debt restructuring arrangement.
Established by more than 180 financial institutions, including 19 major banks and 10 credit card issuers, the counseling agency acts as a mediator between debtors and creditors.
Once a defaulter files with the organization, member institutions are supposed to stop seeking payment and begin discussing an individual workout program.
"Some lenders send back our draft rescheduling proposals over and over. But eventually, more than nine of every 10 applicants get final approval from creditors," said Kim Seung-duk, spokesman for the counseling agency.
The relief scheme is not a panacea for all delinquents, however.
Although the number of people blacklisted by the Korea Federation of Banks has hit 3.83 million, or 8 percent of the population, only a fraction is eligible for the package, as the counseling agency requires applicants to prove their income sources.
"All our visitors are indeed the poor. But ironically, those in most need seem not to be within our reach," said Kang Young-tae, a counselor at the agency.
Under agency requirements, applicants must have a minimum monthly income - about 1 million won per four-person household - and have debt of 300 million won or less with at least two lenders.
Since its opening in October 2002, the agency has succeeded in rearranging debt for only 60,779 people, with the cases of 38,089 still pending and 7,445 completely rejected by creditors.
A bigger portion of the delinquents may be able to benefit from a government-led "bad bank," which is scheduled to provide soft loans in order to help defaulters meet their debt obligations. Still, eligibility is also limited to people who were in arrears on no more than 50 million won for at least six months as of March 10.
Tragic endings
Crushed by debt with no way out, some debt burdens end tragically. One news report after another tells of murders, suicides and kidnappings blamed on over-borrowing.
On Sunday, police arrested a 43-year-old woman and her sister in Yeoju, Gyeonggi Province, on charges of killing their brother-in-law. The two women reportedly became defaulters after the victim failed to pay 200 million won in taxes on properties he bought under the sisters' names.
In the southwestern city of Seosan, a 52-year-old was taken into custody last week on suspicion that he stabbed his wife to death while arguing over 50 million won in card bills she had defaulted on.
"Without thinking of my poor son, I would have killed myself a long time ago," sobbed a 40-year-old housewife, whose family name is Kim, during an interview with a Credit Counseling and Recovery Service staff member.
Kim's husband repairs farming machines during the day and drives home drunken people at night, struggling to pay more than 100 million won in debt she incurred helping her family.
She whipped out the plastic to pay hospital fees for her father until he died of cancer last year and to compensate a car accident victim on behalf of her sister. What faced her, however, was a wave of creditors calling and visiting from early in the morning to wring the last won from her hand.
"They're going just too far. How can they get so menacing after tempting me with all the flattering when they issued the cards? I'm not the one who is to blame," Kim argued.
Many to blame
"Then who is?" asks back Kang, the counselor hearing her application.
The answer could be the government, lenders or borrowers themselves.
Eager to stimulate the economy, the former Kim Dae-jung administration urged people to use their credit cards more by offering tax relief and other incentives.
Card operators, for their part, issued plastic aggressively, performing little or no credit checks on applicants and dispensing high credit limits. Consumers, armed with bulging credit lines, simply overspent.
The aggregate outstanding household debt rose to an all-time high of 447.6 trillion won at the end of December, roughly two-thirds of the nation's gross domestic product.
With the number of credit defaulters rising fast, jumping 41 percent in 2003 alone, card providers also slid into debt. The credit card sector's combined loss hit a record 10.5 trillion won last year, causing LG Card Co., the leading issuer, to seek a bailout.
Observers attribute the credit crunch partly to Korea's unique system, under which anyone who misses debt payments of just 300,000 won or more is put on the credit-watch list, which imposes a range of disadvantages in financial activities and employment. The restraints make it even harder for defaulters to earn money with which they might be able to service their debt.
Card users are also usually required to pay in lump sum when they receive bills the following month.
"The problem is that there's no payment plan built into balances here, whereas other countries have something like a revolving credit system," which allows debtors to pay in installments, said Alan Timblick, head of Invest Korea. The agency is an investment promotion arm of the Korea Trade-Investment Promotion Agency.
The former chief of MasterCard Korea recommended that authorities work out long-term debt payment schedules, rather than offer simple forgiveness, as the latter could spread hopes among delinquents that they will get rescued, prompting them to withhold payments.
Gift to voters?
The government's announcement of the "bad bank" in March sparked criticism that it was pre-election sweetening, targeting voters who are desperate for a lifeline.
According to the Korea Federation of Banks' statistics, nearly half of all debt defaulters, numbering 1.9 million, are aged between 20 and 40, the largest supporters of President Roh Moo-hyun.
"I can feel clearly that debtors' attitude has changed since the bad bank scheme was released," an official at LG Card said, asking not to be named.
The bad bank, a consortium to be set up jointly by the state-run Korea Asset Management Corp. and local financial companies, is designed to allow delinquents to replace their debt with fresh loans at an annual interest rate of around 6 percent for up to eight years.
Awaiting the new rescue, some debtors seem to be just sitting tight, the LG Card official grumbled.
Initially boosting the moral hazard was the National Assembly's decision on March 2 to approve a bill that would waiver part of a delinquent's debt if the person only holds collateralized loans of less than 1 billion won or noncollateralized loans of a maximum 500 million won.
"It seems the government, lawmakers and all other possible helpers are competing to salvage defaulters. The only thing debtors have to do is just wait and see who is the best," said Kang of the Credit Counseling and Recovery Service.
