As the government leads debt forgiveness programs to help vulnerable groups get back on their feet, the financial health of the public institutions shouldering this burden is deteriorating. According to a Seoul Economic Daily report on the 12th, the Korea Asset Management Corp. (KAMCO) posted losses of approximately 1.4 trillion won last year on the New Start Fund alone, a debt restructuring program for small business owners and the self-employed. KAMCO invested 2.4 trillion won in the New Start Fund, but as the number of self-employed borrowers unable to repay their debts grew, the market value shrank to 1.0035 trillion won. Critics point out that KAMCO, which has taken on the burden of "inclusive finance" on behalf of the government, is rapidly deteriorating. KAMCO's debt as of the end of last year stood at 12.735 trillion won, a sharp 27% increase from the previous year.
A recent audit by the Board of Audit and Inspection found that KAMCO had granted 84 billion won in debt forgiveness under the New Start Fund even to individuals with sufficient repayment capacity, including those earning 80 million won a month and holders of 400 million won worth of cryptocurrency. Meanwhile, "Sangnoksu," a private bad bank established more than two decades ago during the credit card crisis to support delinquent borrowers, has delayed its participation in the "New Leap Fund" — a debt restructuring program for long-term delinquents — citing shareholder opposition, creating a blind spot. President Lee Jae-myung posted on X (formerly Twitter) the same day, "I did not know that primitive predatory finance was openly surviving and choking the lives of ordinary people," pointing to the issue. He also raised the matter at a Cabinet meeting, instructing officials to "find a way, even through legislation if necessary."
The political arena is accelerating efforts to expand inclusive finance. The National Assembly's National Policy Committee began deliberations the same day on a bill to establish a microfinance fund to expand inclusive finance. The legislation would create a separate fund at the Korea Inclusive Finance Agency through government budget allocations and contributions from private banks, securing a stable source of financing for microfinance. The ruling and opposition parties shared common ground on the bill's purpose at the meeting but differed on issues such as the size of the fund, and decided to continue discussions.
Measures to provide a stepping stone for recovery to vulnerable groups trapped in debt, including small business owners and the self-employed, are necessary. But if indiscriminate debt forgiveness is repeated, there are concerns that market principles could be undermined. The wrong signal that "if you hold out, your debts will be wiped out" is likely to create a sense of relative deprivation among the majority of debtors who have faithfully repaid their obligations and to foster moral hazard. While preserving the intent of supporting vulnerable groups, sophisticated design and strict enforcement of inclusive finance are required to supplement side effects and deliver tailored support proportional to repayment capacity.
