Financial Services Commission: "Banks, Increase Loans to Small Businesses"... Rising Concerns Over Defaults

Financial Services Commission to Lower Bank Personal Business Loan LDR Standards as Early as Mid-Month
Only 85% of Loans Recognized as Lent... Aimed at Easing Soundness Regulations
Banking Sector Secures Additional Capacity of About 70 Trillion Won for Personal Business Loans

[Asia Economy Reporter Kim Hyo-jin] From this month, banks' lending capacity to small business owners will be significantly expanded. This is because financial authorities have relaxed loan-related regulations in response to the novel coronavirus infection (COVID-19).

According to financial authorities on the 2nd, the Financial Services Commission will soon implement a revision to the bank supervision regulations that lowers the bank loan-to-deposit ratio (loan amount relative to deposits) standard for personal business loans from the current 100% to 85%. This is a follow-up measure to the 'Financial Regulation Flexibility Plan' announced last April in relation to COVID-19 financial support.

The revision will be applied retroactively to personal business loans handled this year. By lowering the loan-to-deposit ratio to 85%, banks need to accumulate fewer deposits for loans, thereby increasing their capacity for new loans. It is expected that this measure will secure additional lending capacity of up to approximately 70 trillion won.

Personal business loans are mostly provided to small business owners. The financial authorities' policy is to actively supply loans to those whose financial capacity is relatively weak and who have been severely affected by COVID-19. A financial authority official said, "Although the additional capacity will not be fully translated into loans, it is expected to provide some breathing room."

As COVID-19 prolongs, the demand for loans from small business owners is expected to continue rising. The outstanding balance of personal business loans at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?stood at 256.9511 trillion won at the end of last month, increasing by nearly 3 trillion won compared to May. Although the growth rate slightly decreased compared to the previous month and April, the overall upward trend continues.

An official from a bank said, "Various policy support funds with a short-term funding nature cannot sustain operations for long," adding, "Since the impact of COVID-19 is becoming entrenched, the trend of relying on loans to maintain business operations is expected to continue."

Banks are concerned about potential future credit quality issues. This is because the repayment capacity of small business owners is likely to deteriorate over time.

Another bank official said, "It is not difficult at all for authorities to lower regulations and for banks to lend more money," but pointed out, "However, if the supplied loans turn into non-performing loans, the risks to borrowers and the overall financial system will increase in the medium to long term, so it is necessary to consider more macro-level measures."

As of the end of April, the loan delinquency rate of domestic banks was 0.4%, up 0.01 percentage points compared to the end of the previous month. The delinquency rate for personal business loans also rose by 0.03 percentage points to 0.36%.

A financial sector official said, "It is true that banks have been managing reasonably well so far based on the loss absorption capacity accumulated before COVID-19 and still have additional absorption capacity," but added, "Concerns cannot be dismissed because financial distress tends to accumulate invisibly and then suddenly surface."

There are also criticisms that the government's loan maturity extension measures are merely a stopgap to suppress the surface manifestation of non-performing loans. Financial authorities are discussing with the financial sector the possibility of extending the loan maturity extension measure, which is currently set to expire in September, by at least three months. Concerns are growing in the financial sector that such a measure will only amount to a 'deferral of non-performing loans.'

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