Loan Interest Rates Vary According to Credit Ratings of Small Business Owners

2nd COVID-19 Loans of 10 Trillion Won Supplied
Interest Rates Likely to Rise Above 1.5%... Expansion to Medium and Low Credit Borrowers
Blocking Loan Refinancing... Single Window Through Commercial Banks

[Asia Economy Reporter Kwon Haeyoung] The government will provide a second round of "corona loans" worth 10 trillion won through commercial banks to small business owners affected by the spread of the novel coronavirus infection (COVID-19). The eligibility for loans from commercial banks will be expanded from previously high-credit borrowers to medium- and low-credit borrowers. Loan interest rates are expected to rise above the current annual 1.5%, and qualification requirements will become more stringent.

According to the financial sector on the 23rd, the government plans to implement the second phase of the small business owner funding support program with these details. The government decided to promote this program at the 5th Emergency Economic Meeting chaired by President Moon Jae-in the day before.

A Financial Services Commission official said, "The main point is to unify the loan window for small business owners through commercial banks and raise the loan interest rate above 1.5% per annum," adding, "This measure aims to prevent speculative demand trying to switch to lower interest rates and increase loan supply to small business owners who truly need funds."

First, the loan interest rate supplied to small business owners will be higher than 1.5%. Currently, IBK Industrial Bank of Korea offers corona loans at the same 1.5% interest rate to small business owners and self-employed individuals with credit ratings from 1 to 6, and commercial banks offer the same rate to those with ratings from 1 to 3. Because loans can be obtained at ultra-low interest rates, there has been some moral hazard, such as demand arising not only from small business owners urgently needing funds but also from those refinancing at cheap rates or investing in stocks or real estate.

Accordingly, loan interest rates will be differentiated according to credit ratings. According to the Korea Federation of Banks, the personal business credit loan interest rate at IBK Industrial Bank is 3.95% for ratings 1 to 3 and 7.5% for rating 6. Going forward, the lower the credit rating, the higher the loan interest rate will be.

The loan window will also be unified through commercial banks. Since IBK Industrial Bank only lends up to rating 6 and commercial banks up to rating 3, small business owners had to visit various places to get loans, causing inconvenience. The government has requested commercial banks to expand the credit rating range eligible for loans and plans to compensate banks for credit risks related to medium- and low-credit borrowers. The government will cover bank losses caused by the difference between existing bank loan interest rates and corona loan interest rates. In addition, loan limits and support conditions are expected to become more stringent than before.

A Financial Services Commission official said, "We plan to meet with commercial banks to discuss detailed plans for the second phase of the small business owner funding support program," adding, "We will promptly prepare specific execution plans considering linkage with the first phase of support."

The government expects the funds for the first phase of the small business owner funding support program to run out this month, so it decided to increase the supply scale by 4.4 trillion won before implementing the second phase program. Accordingly, the support scale will expand from the original 12 trillion won to 16.4 trillion won.

However, banks feel burdened by the fact that supplying funds to small business owners corresponds to unsecured loans, meaning they must bear all future default risks.

An official from the banking sector expressed concern, saying, "Even if the government compensates the interest, banks will have to bear all the default risks for medium- and low-credit borrowers around rating 6, won't they?"

This content was produced with the assistance of AI translation services.