Financial Sector Faces Additional Extension of COVID Loan Maturities... "Just Postponing Defaults"

"Already 40 Trillion in 'Bad Debt Forbearance' Burden..."
Financial Sector Faces Deepening Concerns

[Asia Economy Reporter Kim Hyo-jin] "Not only loans to small and medium-sized enterprises and small business owners, but also general corporate loans are already extending their maturities one after another to hold on. In a situation where it is uncertain whether recovery is possible, additional extensions are merely postponing defaults temporarily." (Senior executive in charge of loans at a major commercial bank in City A)

"If the COVID-19 situation worsens further, we will have no choice but to engage in risk management to recover loans. If financial companies end up shouldering all related defaults, it could lead to an even more serious situation." (Senior executive at Card Company B)

As financial authorities consider additional extensions of loan maturities for small and medium-sized enterprises and small business owners affected by the novel coronavirus infection (COVID-19), financial companies are growing increasingly concerned. With COVID-19 shifting towards an endemic (periodic outbreak) phase, financial companies, which are already bearing enormous burdens, worry that further maturity extensions could lead to loan defaults.

According to the financial sector on the 30th, financial authorities have begun discussions with financial companies about extending loan maturities by at least three months beyond September. This is based on the judgment that, due to the prolonged COVID-19 pandemic, it will be difficult for SMEs and small business owners to recover their financial strength, and the overall economic conditions in finance and real sectors are unlikely to improve rapidly. It is known that financial authorities are mainly seeking opinions from loan department practitioners at commercial banks on whether there would be any difficulties in implementing additional extension measures.

Financial authorities and the financial sector have implemented measures since April to extend the maturities of loans to small and medium-sized enterprises, including individual business owners, whose repayment deadlines fall by September 30. Since the implementation of these measures, as of the 26th, a total of 39.8 trillion won in loan maturities have been extended at commercial banks and second-tier financial institutions. Of this, 39 trillion won was extended at commercial banks.

Son Byung-du, Vice Chairman of the Financial Services Commission, said at the Financial Risk Response Team meeting held that day, "As the expiration of the operation period approaches, we will consider with financial companies whether to extend the period and normalization plans." Earlier, Eun Sung-soo, Chairman of the Financial Services Commission, also stated, "If the COVID-19 situation prolongs, we cannot suddenly wash our hands off in September, so we are raising the issue to think together with market participants about what to do."

In response to these remarks by financial authorities' policy leaders, the financial sector is treating additional extensions as a foregone conclusion. They also express concerns that such measures may ultimately amount to merely 'postponing defaults.' A senior official in charge of loans at a commercial bank said, "The fatigue accumulated over six months from April to September is already considerable," adding, "If maturities are extended again without additional measures for loan recovery, it will be a fatal blow to soundness."

Another bank official pointed out, "If financial authorities ultimately say 'let's do additional extensions,' we have no choice but to follow," adding, "I am worried not only about the bank's soundness but also about the increased hardships that borrowers will bear in the future."

Since April, financial authorities have temporarily eased various soundness-related regulations, such as liquidity coverage ratio (LCR) relaxation and adjustment of loan weighting in the loan-to-deposit ratio, to increase COVID-19-related loan capacity in the financial sector. One official said, "If additional extensions are made, simultaneous consideration should be given to extending or adjusting temporary regulatory relief measures that allow financial companies to increase their capacity."

The overall loan dependency in the economy is increasing. According to the Financial Stability Report recently released by the Bank of Korea, as of the end of the first quarter of this year, household loans amounted to 1,611.3 trillion won and corporate loans to 1,229.2 trillion won, expanding by 4.6% and 11.6% respectively compared to the same period last year. Accordingly, the private sector debt ratio to nominal gross domestic product (GDP) reached 201.1%, exceeding twice the GDP for the first time in history.

The scale of funding shortages among domestic companies is analyzed to reach 30.9 trillion won. A financial sector official said, "Some financial companies are barely holding on," adding, "This is the result of suppressing the surface of defaults through various grace measures such as loan maturity extensions."

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