The financial regulator said Tuesday that it has decided to relieve about 5 percent from the blacklist of 2.36 million credit delinquents, who were hit by the 1997 Asian foreign exchange crisis.

The rescue package for some credit defaulters comes under policy direction of the Park Geun-hye administration to give aid to low-income households, said the Financial Services Commission.

Out of the 2.36 million individuals that were blacklisted between 1997 and 2001, the FSC initially screened some 114,000 individuals ― who have been suffering through economic difficulties after they failed to pay back debt of insolvent small and mid-sized enterprises “as guarantors.”

An FSC director general said their delinquency records of the debts held by financial firms “will be deleted” to help their ordinary transactions with banks and other lenders.

In addition, they will also be allowed to enjoy a debt rescheduling program involving “reduction of principal and interest,” he said.

Applicants will be allowed to pay back their debt step by step on an installment basis up to the coming 10 years.

But FSC officials clarified that applicants should satisfy the eligibility that they were guarantors of SMEs during the 1997 financial crisis.

The outstanding loans financially pressuring the 114,000 debt guarantors come to 13.2 trillion won. ($12 billion).

The state-controlled Korea Asset Management Corp. will play as the operator of the government-led credit recovery package from July 1 to Dec. 31, said the FSC.

Over the past several decades, lenders in the nation have demanded that some individuals or smaller businesses submit third-party debt guarantees when applying for loans.

Such guarantees have frequently triggered a chain reaction of bankruptcy for guarantors, such as families, relatives and friends, when borrowers were unable to pay back their debt.

The FSC is poised to impose a ban later this year on joint guarantees on loans extended by secondary financial firms, following the earlier abolishment of the lending practice among commercial banks.

In a similar vein, financial authorities have also taken preliminary applications for the “National Happiness Fund” recently set up to rescue individual credit defaulters, apart from the 1997 crisis. The authorities will screen applicants between May and October.

Applicants should be in arrears for at least 180 weekdays and their debt should not exceed 100 million won.

While some critics expressed alarm at the possibility of the fund creating moral hazard, FSC chairman Shin Je-yoon stressed that the fund was not a cure-all.

“It must lead to regaining credit since the fund cannot resolve every single problem,” Shin said during his recent speech at the KAMCO headquarters in southern Seoul.

The chief financial regulator added that a precondition of the fund’s success was helping debtors not only reschedule their debts but recover their credit.

By Kim Yon-se (kys@heraldcorp.com)