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 debt repayment and discusses the optimal principal reduction rate. We use a logit model and propensity score matching, employing the unique dataset of creditors’ ledger, debt adjustment information, and debtors’ characteristics from KR&C, which manages bad debts in Korea. Classifying debtors into beneficiaries and non-beneficiaries of the debt adjustment program, we find that the repayment amounts of beneficiaries are larger than those of non-beneficiaries. Additionally, a quadratic function consisting of expected repayment rates and reduction rates is postulated to explore the moral hazards that may arise if the principal reduction rate is expanded, and an appropriate reduction rate is derived. We find that if the reduction rate is expanded from 60% to 70%, it does not reach the maximum repayment rate, but the effectiveness of the debt adjustment system and the stability of the fund are maintained.