Will COVID Loan Interest Repayment Be Delayed Again...Concerns Over Soundness Increase↑

Government Discusses Additional Extension of Loan Maturity Measures
Financial Sector Agrees on Loan Maturity
Negative on Interest Repayment Deferral

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] Financial authorities are facing growing concerns from the secondary financial sector regarding the extension of loan maturities and interest repayment deferrals for small and medium-sized enterprises (SMEs) and small business owners affected by the novel coronavirus infection (COVID-19). In particular, these financial companies agree on the necessity of extending loan maturities but find it difficult to accept interest repayment deferrals due to concerns over credit soundness vulnerability.

According to financial authorities and the financial sector as of the 7th, loans with extended maturities amounted to 73.4 trillion won, of which 50.9 trillion won were from private financial companies including commercial banks and secondary financial institutions.

Earlier in March, financial authorities extended loan maturities and implemented interest repayment deferral measures for six months to ease the financial burden on SMEs and small business owners. The deadline is next month on the 30th. Given the ongoing economic downturn, authorities are leaning toward an additional extension and are discussing this with the financial sector. Financial companies agree with extending loan maturities but, especially in the secondary financial sector, they find it difficult to accept interest repayment deferrals. The concern is that if interest repayments are also deferred, it becomes difficult to evaluate the borrower's creditworthiness through interest payments, leaving no clear standard to assess credit soundness.

A credit industry official said, "Due to the prolonged COVID-19 situation, difficulties for small business owners continue, so we sympathize with extending loan maturities," but added, "If interest repayments are also deferred, it becomes impossible to know the borrower's situation, making risk management difficult." Another financial sector official stated, "Interest is also money that must be repaid, and if interest repayments are postponed again, it could place a greater burden on the borrower," adding, "Those who can repay interest should do so to prevent moral hazard and reduce the burden of repaying a large sum later."

Credit rating agencies also pointed out concerns that so-called 'life-support loans,' where financial companies continuously extend loan deadlines, could make it difficult to accurately assess the asset soundness indicators of financial companies. Lee Hyuk-jun, Head of Financial Evaluation at NICE Credit Rating, said, "The extension of loan maturities and interest repayment deferrals for marginal borrowers reminds us of the refinancing loans during the 2003 credit card crisis." He explained, "Life-support loans, where financial companies continuously extend loan deadlines even though borrowers no longer have the ability to repay, appear as normal loans on the surface but are essentially non-performing loans. If such measures continue, the asset soundness indicators of financial companies become meaningless, making it difficult for financial authorities and credit rating agencies to make accurate assessments that reflect the true condition of financial companies."

Meanwhile, on the same day, Eun Sung-soo, Chairman of the Financial Services Commission, held a private meeting with heads of financial associations including the Korea Federation of Banks, Korea Financial Investment Association, Life Insurance Association, General Insurance Association, Credit Finance Association, and Korea Federation of Savings Banks. They discussed whether to further extend loan maturity extensions and interest repayment deferrals related to COVID-19 financial support.

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