The Effect of Bad Debt Adjustment on Repayment: Evidence From KR&C’s Dataset in South Korea

Abstract

This study investigates the effect of debt adjustment for bad debts on repayment and discusses the optimal principal reduction rate. We use a logit model and propensity score matching, employing a unique dataset of creditors’ ledgers, debt adjustment information, and debtors’ characteristics from Korea Resolution & Collection (KR&C), which manages bad debts in Korea. Classifying debtors into beneficiaries and non-beneficiaries of the debt adjustment program, we find that beneficiaries have larger repayment amounts than non-beneficiaries. An appropriate reduction rate is derived from a quadratic function consisting of expected repayment rates and reduction rates. This is also postulated to explore moral hazards that may arise from the expansion of the principal reduction rate. We find that if the reduction rate is expanded from 60% to 70%, it does not reach the maximum repayment rate, but does maintain the debt adjustment system’s effectiveness and the fund’s stability.

Keywords: KR&C, PSM, bad debt adjustment, principal reduction rate, moral hazards

JEL Classification: D1, G2, G5, H0