Abolishing the collaborative debt guarantee

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Hello again, everyone. With the beginning of a new semester, you might be busy studying and taking exams. Some of you might be looking for a job. But is there anyone thinking of starting your own business? I bet most of you would say “no”.

Then, why are there only few people starting their own businesses? In Korea, it is quite difficult to start a business by oneself, considering the high risk. Also, ‘collaborative debt guarantee’ has been a drag on individual entrepreneurs. Responding to this concern related to collaborative debt guarantee, FSC decided to abolish it in May 2012. Since the abolishment, almost three months have passed. In this blog post, I will tell you what has happened since then.

In the past, every single person needed a joint surety to receive a loan. Besides, if two or more people run a business together, all of them were bound by a collective responsibility of debt payment. In short, this collaborative debt guarantee worked as a binding liability, which became too burdensome for each individual. So, by abolishing it, FSC aimed at minimizing the loss suffered by individuals and promoting more start-up businesses.

As a result of the abolishment, now an individual can borrow money from banks without letting their friends, family members, or relatives stuck in a huge debt in case of the loan not being repaid. Isn’t it quite an impressive change? So, you might expect a lot to be changed. Before implementing this measure, FSC had expected that about 440,000 people would benefit from it. However, unfortunately, little things have changed. In fact, non-monetary institutions, such as mutual savings banks, still require joint sureties. This is because this abolishment is valid not to every financial institution, but to only 18 banks and the trust guarantee funds. So, the other financial institutions are still able to request an individual to bring a joint surety. This kind of partial implementation seems to make the abolishment not as effective as intended.

But, don’t be disappointed by it yet! Three months time after the abolishment is not long enough time to judge the overall effect. It is thought that the nonmonetary institutions are being defensive at the moment, as worried about a possible loss that they haven’t faced. Also, economic recession contributes to those institutions’ reluctance to remove a joint surety system. If financial authorities keep trying to bring the intended effects of the abolishment, the originally expected outcome will take root in the market.

As you know, collaborative debt guarantee has put so much pressure on many business owners and their joint sureties. There is no need to mention that FSC’s decision to abolish it was definitely the right one. Now, all we need is just taking a little bit more time. Let’s wait for a while rather than blame the government’s decision. See you next time, everyone!

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