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Asian Review of Financial Research Vol.32 No.2 pp.187-219
Empirical Analysis of Consumer Credit Recovery
Hyeongjun Kim Professor, College of Business Administration, Yeungnam University
Doojin Ryu 성균관대학교 경제대학 교수
Hoon Cho Professor, College of Business, Korea Advanced Institute of Science and Technology
Key Words : Consumer Credit,Debt Restructuring,Default,Household Debt,Unsecured Debts


The continuous increase in household debt in Korea over recent years has been widely noted as a potential risk to the country's economy. In particular, the sustained increase in U.S. interest rates have raised the risk of default on household debt. To prevent the spread of household defaults in the economy as a whole, policies for consumer credit recovery should be re-evaluated, and institutional improvements are needed. This study considers the characteristics of delinquent borrowers and draws policy implications from a quantitative analysis of data from a representative consumer credit recovery program. In particular, we assemble a massive but precise micro-data set to identify the major factors that influence the process of consumer credit recovery. From the findings, we derive a set of substantial policy proposals. Our analysis classifies delinquent borrowers into three groups as follows: (i) group A, delinquent borrowers who are eligible for the credit recovery program; (ii) group B, delinquent borrowers who have applied to the program and are paying off their debt; and (iii) group C, delinquent borrowers who have completely paid off their debt and are no longer part of the program. Our results have several policy implications. First, the probability that delinquent borrowers will settle their debt by using the credit recovery program gradually decreases as the delinquency period increases. In addition, the probability of delinquent borrowers settling their debt through the credit recovery program is significantly affected by the amount of their debt, their age, and the period of delinquency. The empirical results also show that delinquent borrowers with smaller bonds, lower ages, and shorter delinquency periods have a higher tendency to join the program, and a greater willingness to recover their creditworthiness. A longer delinquency period and a higher age both reduce the probability of starting the program. Therefore, it is necessary to start the credit recovery program and manage it within the system before the delinquency period grows too long. Second, the probability of completing the program gradually increases as the delinquency period becomes longer. The successful completion of the program is mainly a function of the amount of debt and the debt reduction rate. A smaller bond and a higher debt reduction rate make it easier to repay the debt and complete the program. Notably, we find that borrowers with longer delinquency periods are more likely to pay off their debt completely, and this finding is robust after controlling for the debt reduction rate. This pattern emerges because a longer delinquency period increases the debt reduction rate, and improves the borrower's ability to repay the debt. Over time, the causes of delinquency (e.g., unemployment and illness) tend to be resolved, and the borrower's ability to repay increases. Therefore, it is necessary to consider expanding the grace period (i.e., the period in which a borrower does not need to follow the repayment plan), as this allows borrowers more time to recover their ability to repay the debt. Third, there is a time limit to the recovery in a borrower's ability to repay. Borrowers with longer delinquency periods are more likely to pay off their debt completely, because the causes of delinquency are more likely to be resolved. However, borrowers who are overdue by more than 10 years are less likely to complete the credit recovery program. Currently, the government is promoting a debt relief program for delinquent borrowers whose total debt is less than KRW10 million, and whose delinquency period is longer than 10 years. Our results provide an empirical basis for this policy. In considering the empirical results regarding the relationship between the delinquency period and the probability of completing the program, we suggest that the program's efficiency can be improved by restricting the number of extensions of the valid period for delinquent debt, restricting the extensions to small amounts of money, and offering such extensions to low-income borrowers only.
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