Commercial Banks to Inject Additional 10 Trillion Won in 'COVID Loans'... Interest Rates Adjusted from 1.5% to Tiered by Credit Rating (Comprehensive)

Interest Rates Likely to Rise Above 1.5%... Expansion for 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 include medium- and low-credit borrowers. Loan interest rates will increase from the existing annual rate of 1.5%, and qualification requirements are expected to become more stringent.

According to the financial sector on the 23rd, the government plans to implement this second phase of the small business funding support program. 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 small business loan window through commercial banks and raise the loan interest rate above 1.5% per annum," adding, "This measure aims to prevent speculative demand seeking to refinance at lower rates and to 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 a uniform 1.5% interest rate to small business owners and self-employed individuals with credit ratings from 1 to 6, while commercial banks provide 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 from those refinancing at low rates or investing in stocks or real estate, not just small business owners urgently needing funds.

Accordingly, loan interest rates will be differentiated by credit rating. 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 multiple places to obtain loans, causing inconvenience. The government has requested commercial banks to expand the credit rating range for loan eligibility 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 rates. Additionally, 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 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 funding support program to run out this month, so it decided to increase the supply amount 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 interest, banks will have to bear all the default risks for medium- and low-credit borrowers around rating 6."

Meanwhile, commercial banks and IBK Industrial Bank are supplying ultra-low interest loans to small business owners. Commercial banks provide loans at a 1.5% interest rate for up to one year with a limit of 30 million won to small business owners with credit ratings 1 to 3 and annual sales below 500 million won. Following the Financial Services Commission's recommendation, banks must execute loans to small business owners who meet credit ratings 1 to 3 based on NICE Credit Rating regardless of their internal credit rating. Even if they fall below rating 3 according to credit bureaus, loans can be granted if they meet the bank's internal credit rating. IBK Industrial Bank is supplying loans at a 1.5% interest rate for up to three years to small business owners and self-employed individuals with credit ratings from 1 to 6.

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