One in three individuals who were previously delinquent in repayment and had those records cleared from their credit history by the government borrowed again and failed to repay on time, data showed Friday.

This cycle of repeated late repayments raises serious moral hazard concerns, as President Lee Jae Myung plans to forgive a record 3.24 million people with past missed or overdue payments by the end of the year.

According to data that NICE Information Service and Korea Rating and Data (KODATA) submitted to Rep. Lee Yang-soo of the People Power Party, 955,559 people out of 2.86 million, or 33.3 percent, who received credit pardons last year were delinquent in repayment again.

After their delinquency records were removed under the government's relief program, these individuals borrowed a total of 38.32 trillion won ($27.49 billion) from financial service companies.

As of the end of July, 28.51 trillion won remained delinquent, meaning 73.7 percent of the borrowed amount has yet to be repaid.

Because erasing delinquency records improves credit scores, many recipients were able to secure new loans from mainstream financial institutions.

Of the total loans issued after records were cleared, 16.6 trillion won, or 43.4 percent, came from major commercial banks, borrowed by 396,612 people.

Another 798,006 borrowers turned to second-tier institutions such as savings banks, credit card companies and insurers, securing 17 trillion won, or 44.6 percent, in loans.

The remaining 4.6 trillion won was issued by private lenders and other third-tier institutions.

Under these circumstances, Rep. Lee raised concerns over moral hazard. "Wiping out negative credit records can make negligent borrowers even less faithful in repayment and discourage people who have worked hard to repay their debts."

The lawmaker referred to the Lee administration's announcement on Aug. 11, which stated that 3.24 million debtors with debts of 50 million won or less would have their delinquency records deleted if they fully repay their debts by the end of the year.

This is expected to be the largest pardon ever, surpassing the number of people pardoned under the Yoon Seok Yeol administration.

The debt limit is also 2.5 times higher compared to the previous government's cap of 20 million won.

"The government should abandon this populist approach and instead focus on helping individuals who truly show the will and capacity to recover financially," Rep. Lee said.

Financial experts warn that the blanket removal of delinquency records makes it harder for lenders to assess risks.

"When banks can't distinguish between those who have defaulted before and those who haven't, they're forced to raise interest rates for everyone," one expert said. "It penalizes responsible borrowers and increases systemic risk."

1 in 3 pardoned borrowers default again, raising moral hazard concerns - The Korea Times