Card payments surge 2.4-fold just before debt relief, warning of inclusive finance distress

Policy loans for low-income households and debt restructuring programs, which the Korean government has expanded under the banner of a financial safety net for vulnerable groups, are facing serious structural distress. Contrary to their original purpose of rescuing marginal borrowers who cannot repay their debts, abuse cases are piling up as repayment screening and post-verification remain weak. With delinquency rates on policy finance soaring, critics say the government is only lowering loan thresholds without safeguards against moral hazard, accelerating the erosion of funds.

Policy finance that lends small living expenses is on the verge of becoming unrecoverable. Of the 314 billion won (about $232 million) in total outstanding loans under the Korea Inclusive Finance Agency's small living expense loan program, overdue balances with principal or interest more than one month past due reached 139.1 billion won (about $103 million). The product's delinquency rate jumped from 11.7% at the end of 2023 to 42% at the end of June this year, and surpassed 44% by the end of September. That means more than four out of every 10 loans are facing collection problems. The cumulative number of subrogated payments for the three Sunshine Loan products, a flagship inclusive policy finance program, also exceeded 100,000 cases through August this year.

The flashpoint of distress is concentrated among young borrowers with weak economic foundations. By age group, borrowers in their 20s and younger had the highest delinquency rate at 50.7%, followed by those in their 30s at 45.5%, 40s at 43.4%, 50s at 41.4%, 60s at 39.4%, and 70s and older at 38.9%, showing a regressive structure where delinquency rates rise as age falls. The program provided up to 1 million won per person to prevent borrowers from turning to illegal lenders, but one in two borrowers in their 20s cannot even repay small living expenses.

A bigger problem is that the debt restructuring system, which should rescue borrowers on the brink, is turning into a channel for moral hazard by some users seeking debt forgiveness. According to data submitted by eight credit card companies—Shinhan, Samsung, Hyundai, KB Kookmin, Lotte, Hana, Woori, and BC Card—to the office of Rep. Park Sung-hoon of the People Power Party on the National Assembly Political Affairs Committee, 79,701, or 22.1%, of the 360,531 individual rehabilitation and individual workout applications filed from January through August this year increased their average monthly card spending in the one to two months before filing compared with the previous three to six months. That means one in five applicants about to enter debt restructuring aggressively expanded spending instead.

Their spending patterns were far from essential living expenses. The average monthly card payment of applicants who increased card use surged 2.4-fold from 666,814 won to 1,605,691 won right before filing. In particular, payments for luxury goods such as watches, jewelry, and bags jumped more than 12-fold from an average of 63,000 won to 777,000 won per month. In one case, a borrower in his 40s bought jewelry worth 14 million won (about $10,332) on a card installment plan a month before applying for debt restructuring and then received a principal reduction of 19 million won (about $14,022). Another case involved a borrower who purchased a luxury sedan worth more than 55 million won (about $40,590) on a card installment plan and applied for debt forgiveness just months later.

The New Start Fund, launched under the banner of helping small business owners recover, has also shown signs of fraudulent receipt such as asset concealment. According to Korea Asset Management Corporation (KAMCO), 16 borrowers had their debt restructuring agreements canceled after being caught hiding assets such as real estate worth hundreds of millions of won from the fund's launch through August this year. The principal they attempted to have unfairly forgiven reached 1.055 billion won (about $778,590). This is evidence that the public debt restructuring system, operated under the pretext of rescuing vulnerable groups, is becoming prey to deliberate delinquency and indiscriminate debt forgiveness because post-verification mechanisms are not working properly.

Despite this, financial authorities are focusing on expanding loan supply without strict supplementary measures to address rising delinquency rates and moral hazard concerns. Starting next year, authorities plan to revamp the small living expense loan into the K-Livelihood Protection Loan, significantly expanding eligibility to the bottom 50% of credit scores, with an annual interest rate of 4.5% and a repayment period of up to 10 years. Concerns are rising that extending maturities and expanding eligibility without precise assessment of repayment capacity will deepen borrowers' debt dependence and only accelerate the erosion of policy finance funds.

To preserve the original purpose of inclusive finance, institutions that restore borrowers' actual repayment capacity must be supported before funding is supplied. Whether financial authorities can strengthen job and welfare linkage programs at the loan execution stage and establish strong exclusion criteria for debt reduction in cases of abnormal card payments or asset concealment right before debt restructuring applications will be a key indicator of normalizing the public financial system.

(Dollar figures are approximate, converted automatically at 1,000 won = $0.738, the rate on Nov. 8, 2026.)

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.