INSIGHT

Easing the Debt Burden through Sustained Credit Support

The pandemic has made it more difficult for financially strapped people to repay their debts. Photo credit: KIF.
The pandemic has made it more difficult for financially strapped people to repay their debts. Photo credit: KIF.

Published: 19 April 2021

Financial support and credit rehabilitation can help financially vulnerable borrowers to repay their debts amid economic impacts of COVID-19.  

Introduction

The availability of vaccines has given the world a chance to control or minimize the threat of the coronavirus disease (COVID-19) pandemic. However, it will take time to inoculate as many people as possible to reach population or herd immunity. Though some industries and sectors have started to recover, pandemic-triggered disruptions to economic activities would continue to challenge the ability of individuals to earn and their willingness to pay for goods and services.

Among the hardest hit by this pandemic are the financially vulnerable individuals. Already with depleted savings and assets, they will find it more difficult to manage their debts as the economic shock stretches. This calls for policies that sustain economic stimulus and pre-workout programs, particularly for low-income borrowers.

Analysis

In the Republic of Korea, the service industry has been slower to recover from shocks than the manufacturing sector. Since the 1997 Asian currency crisis, the standard deviation of the industry’s year-on-year productivity growth rate has risen to the highest level. In the first three quarters of 2020, revenues of public administration, national defense, social security, financial and insurance business, and real estate business expanded by 4.2% from a year ago, while arts and sports (-26.4%), leisure (-26.4%), transportation (-15%), lodging and dining services (-13.7%) suffered financial losses.

Household spending also showed divergent results. In the third quarter of 2020, spending on leisure and cultural activities (-28.1%), education (-13.6%), clothing and shoes (-13.6%), dining and lodging (-6.6%) declined, while spending on household appliances and home care services (19.8%), food and non-alcoholic beverages (18.7%), healthcare (12.8%), and alcoholic beverage and cigarettes (10.7%) rose sharply. 

Meanwhile, the employment rate stood at 66.3% in November 2020 or 1.1 percentage points lower than the previous year. As the labor participation rate fell, the unemployment rate rose to 3.4% or 0.3 percentage points more than the previous year. For people aged 15 to 29, the unemployment rate rose from 1.1%p to 8.1%p, while the unemployment rate rose from 4.0%p to 24.4%p. 

In the second quarter of 2020, the income growth rate based on market income (sum of labor income, business income, asset income, and private transfer) fell sharper for the poor. The growth rate of disposable income (sum of market income and public transfer) was higher for the same group due to government subsidies. By the third quarter of 2020, the economic divide narrowed, but the income growth rate is still lower for the low-income class. Meanwhile, the growth rate of disposable income was similar across income brackets, reflecting a significant impact of income redistribution due to government subsidies and economic stimulus. 

However, COVID-19 resurgence in some areas of the Republic of Korea led to another series of business closedowns and layoffs—summer of 2020.  While inflation is likely to gradually pick up with the economic recovery, price recovery in the service industry and other vulnerable sectors would be slower. Employment rate would remain low. 

Housing and stock prices continue to rise, widening the wealth divide in the country especially between Seoul and other regions. In the stock market, bio tech firms, information technology firms, and game companies have outperformed traditional companies. 

As the economic shock continues for more than a year and the economic divide widens, it would be more difficult for the financially vulnerable borrowers to repay their debt. 

Implications

The government must design policies that will ease the debt burden of financially vulnerable individuals until the economy and industries steadily recover. The government and the financial sector should bear the cost of maintaining the funding intermediation for financially strapped people. This is to improve their credit recovery, to encourage them to still repay their debts on time, and to save their credit rating from deteriorating.

Moreover, nonfinancial support such as digital transformation, business restructuring, education, and training must be strengthened and sustained. For borrowers with weakening repayment ability, a pre-workout program must be advised in advance. It is a form of credit rehabilitation that allows cutting interest rates up to 50% for unsecured loans to be repaid in installments over a period of up to 10 years.

Resources

J. Koo. 2019. Implications of Improving Credit Rehabilitation for Low-Income Borrowers. Development.Asia. 29 May.

Korea Institute of Finance

Ask the Experts

  • Sungwook Park
    Senior Research Fellow, Macroeconomic Research Division, Korea Institute of Finance

    Sungwook Park specializes in macroeconomics and international finance. Prior to joining the Institute, he worked at the Bank of Korea from 1994 to 2009. He received his Bachelor of Arts from Seoul National University, and his master’s and PhD in Economics from the Ohio State University.

  • Korea Institute of Finance (KIF)

    The Korea Institute of Finance provides expert analysis for the development of the Republic of Korea's financial sector and financial policy.

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