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. Last Updated: 07/27/2016

South Korea to Rescue Delinquent Debtors

SEOUL, South Korea -- South Korea said it will bail out at least 400,000 individuals who can't pay their debts to try and boost an economic growth rate that fell by half last year to about 3 percent.

The rescue plan, which comes five weeks before parliamentary elections, will apply to people who borrowed less than 50 million won ($42,600) from at least two lenders, the Finance and Economy Ministry said in a statement. About 1.5 million Koreans, or 3 percent of the population, meet that criteria. The ministry said it may later bail out another 200,000 defaulters.

One in 13 Koreans are three months or more behind on debt payments, according to the Financial Supervisory Commission. Rising delinquencies are crimping consumer spending, which makes up more than half of Korea's $477 billion economy.

"The government needed to tackle this serious problem, but the timing of the announcement is questionable," said Lee Phil Sang, an economics professor at Korea University in Seoul. "If you are blacklisted as a credit delinquent, you basically become economically crippled. It's natural this kind of announcement will reach out to many voters out there."

The government will set up a collection agency to buy consumer loans from banks and other lenders. The agency will offer new loans at low interest rates to individuals, giving them eight years to settle their debts, Finance and Economy Minister Lee Hun Jai said at a press conference in Seoul.

Korea Asset Management Corp., which is government owned, and financial institutions, which have $34.3 billion of bad loans, will provide as much as 500 billion won ($427 million) of funding to the new agency, said Kim Seok Dong, director-general at the ministry's financial policy bureau. At least 400,000 people will be rescued by the agency, he said at a press conference in Seoul.

"The government is trying to create an environment to help debtors repay debt over a period of time," Finance and Economy Minister Lee said. "It's not related to the election."

Kookmin Bank Vice President Lee Seong Kyu, who heads the bad loans division at the nation's largest lender, will act as the key coordinator for particpating banks, the minister said.

"I think it's a good program because it will allow banks to unburden their bad retail loans," said Kwon Yook Sang, general manager at Kookmin Bank. "There are more pros than cons to the plan."