Gyeonggi Province Gov. Lee Jae-myung’s idea for a government loan relief program -- in which the state would forgive and pay off interest on loans for those in the low income bracket -- was met with criticism from the banking sector.

Lee recently said via Facebook that a “welfare state must take responsibility for the financial risks of ordinary citizens,” and “a welfare loan system where everyone can receive low-interest, long-term loans with the government financially mending the losses from unpaid debt must be adopted.”

Lee suggested a 10 percent cap on interest, calling the status quo an “exploitative financial system for ordinary citizens that must be changed into a ‘fair system’ based on humanism.” A cap on interest would make it possible for the government to cover losses for defaulters with state funds, he explained.

Responding to concerns that such a policy could push low-credit borrowers toward the illegal private lending market, Lee said a separate law could be drafted to address that problem.

Local banking sector employees are expressing skepticism about the governor’s remarks.

On the South Korean social networking platform Blind, which specifically targets corporate employees, one anonymous employee uploaded a post on Monday, asking, “Is this even possible? Does this mean we can just extend loans to whomever we want, whenever we want?”

“If that policy ever materializes,” another user wrote, “then anyone except for civil servants and employees working in large corporations and state-run institutions should not borrow loans.”

The response from the banking sector suggests that many believe slashing interest rates for low-credit borrowers would dissuade banks from extending loans to high-credit customers. It could also fuel moral hazard among lenders, with the government tackling the role of loan assessment. 

By Jung Min-kyung (mkjung@heraldcorp.com)