June 23, 2025
SEOUL – The South Korean government’s plan to launch a “bad bank” to ease the burden on individuals struggling with loan or debt repayment has drawn mixed reactions.
Some view the initiative as a safety net for the financially vulnerable and a means to reduce the strain of bad debt on the broader financial system. Others raise concerns over moral hazard and potential fiscal pressure on the economy.
What is a bad bank?
A bad bank is not a traditional bank; it is a special-purpose financial entity created to acquire and manage non-performing assets or bad loans from existing lenders.
It purchases these loans at a small fraction of their original value and offers flexible repayment options based on the debtor’s willingness and ability to settle. In many cases, it allows borrowers to repay only a portion of the principal, forgiving the remainder.
During his election campaign, President Lee Jae Myung pledged to establish a bad bank to relieve the financial burden of indebted individuals, particularly small business owners whose debts surged during the COVID-19 pandemic. A significant portion of these debts, amounting to roughly 50 trillion won ($36.4 billion), is set to mature in September.
Lee is no stranger to the concept. As mayor of Seongnam City, he founded Jubilee Bank, a nonprofit organization that provided debt relief for long-term delinquent borrowers.
Bad bank v.2025
On Thursday, the Financial Services Commission unveiled the details of the proposed bad bank in conjunction with the announcement of a new supplementary budget.
The bad bank will be established as a corporation under the Korea Asset Management Corporation, the state-run non-performing loan resolution agency, experienced in running policy financing initiatives.
The initiative is aimed at providing debt relief to financially vulnerable individuals and small business owners who are more than seven years overdue on unsecured loans of up to 50 million won.
After acquiring these delinquent loans, the bad bank will assess the debtor’s income and assets to determine whether to write off or restructure the debt.
Borrowers earning less than 60 percent of the median income, who have no disposable assets and are deemed incapable of repayment, will have their debts fully forgiven. Others who are considered highly unlikely to repay may see up to 80 percent of their principal reduced and will be allowed to repay the remaining balance over 10 years.
According to government estimates, the program will target non-performing loans totaling 16.4 trillion won, potentially benefiting around 1.13 million individuals.
The government will allocate 400 billion won from the supplementary budget, with an additional 400 billion won expected from private financial institutions, including commercial banks.
Mixed outlook
Some experts view the bad bank as a way to create a social safety net, reduce financial strain and even stimulate private consumption, ultimately contributing to a healthier financial system.
Specialized credit finance companies, such as credit card issuers and installment financing firms, are expected to benefit from the program, as the sale of distressed assets would improve their financial standing.
“Korea has experience operating bad banks during major economic crises. Based on this experience, a bad bank can help swiftly resolve non-performing assets and stabilize the financial system,” said Kim Sang-in, a credit analyst at Shinhan Securities.
However, the initiative may burden private financial institutions, which are expected to contribute a total of 400 billion won. An FSC official said the regulator had reached a “mutual consensus” with the sector regarding the scale of contributions.
Still, some in the banking industry suggest this consensus may not be entirely voluntary. In 2023, banks decided to pour in 2 trillion won to contribute to a similar initiative amid the regulatory bodies’ demand for the banking sector to step up efforts to support the public who were pressured by surging interest rates.
“As a licensed business, it is difficult for a bank to reject a request made by the regulator,” said an official at a local commercial bank.