South Korea Tightens Rules on Delinquent Debt Sales, Prioritizes Borrower Support

South Korean financial authorities are implementing stricter regulations on the sale of delinquent bonds and increasing support for borrowers with lower credit ratings, a move that is reshaping the landscape of debt management within the nation’s banking sector. The changes aim to curb aggressive debt collection practices and provide more opportunities for borrowers to restructure their debts, but also present new challenges for banks facing rising delinquency rates.

Restrictions on Delinquent Bond Sales

The Financial Services Commission (FSC) announced plans to limit the sale of overdue receivables, addressing concerns that financial companies were too readily transferring responsibility for debt collection to external parties. The FSC believes that, as lenders initially assess the risk associated with loans, they should actively pursue debt adjustments before resorting to sales. Financial authorities will repair the practice of “maximizing the collection” of overdue bonds, and financial companies that actively adjust their debts will be more advantageous in evaluating inclusive financial performance.

Specifically, the sale of rapid debt restructuring bonds – those delinquent for 30 days or less – is now, in principle, prohibited. This is intended to encourage financial institutions to support repayment at the earliest stages of delinquency. Even after a sale, banks and original creditors retain responsibility for customer protection. Financial companies are now required to regularly check for illegal collection practices by the transferee every six to twelve months.

Impact on the Banking Sector

These restrictions are causing concern within the banking sector, which traditionally manages delinquency rates by classifying long-overdue loans as non-performing loans (NPLs) and either writing them off or selling them to asset securitization companies. Banks fear that limiting sales will increase their burden of managing delinquent debt and potentially impact their financial performance.

One commercial bank official noted that recovery through debt restructuring is often a lengthy process, making it less appealing than the immediate cash recovery offered by a sale. Another official expressed a dilemma: balancing the need to manage existing overdue receivables with the simultaneous requirement to expand loans to borrowers with low to medium credit scores.

Expanding Support for Vulnerable Borrowers

Alongside the restrictions on debt sales, the government is expanding loan programs targeted at borrowers with lower credit ratings. The scale of the ‘New Hope Spore’ loan product, designed for these borrowers, will increase from 4 trillion won to 6 trillion won by 2028, with broadened eligibility criteria. Internet-only banks are also being directed to increase their lending to this demographic, raising the standard target for new credit loans from 30% to 35% by 2028.

The ‘Sitdol Loan’ program has also been adjusted to allow medium-credit borrowers to access larger loans at lower interest rates.

Rising Delinquency Rates

These policy changes come as South Korea’s bank loan delinquency rate reached a ten-year high at the conclude of 2025, reaching 0.50% according to the Financial Supervisory Service. This is the highest level since the end of 2015 (0.58%), despite banks actively writing off or selling NPLs.

Authorities Downplay Soundness Concerns

Despite the potential challenges for banks, financial authorities maintain that the impact on the overall soundness of the financial sector will be limited. They argue that soundness is determined by provision management and the actual possibility of recovery, not simply whether or not a debt is sold. They also emphasize that early-stage debt restructuring can often lead to better recovery rates.

Oh Yoo-jeong, head of the FSC’s Microfinance Department, stated that interpreting debt restructuring solely as a loss is a narrow perspective, and that proactive debt management, as practiced in countries with strict financial regulations like the United States, can actually improve recovery outcomes.