Concerns Over Soundness... Will COVID Loan Interest Repayment Be Delayed Again? (Comprehensive)

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 considering whether to extend the loan maturity and interest repayment deferral measures for small and medium-sized enterprises (SMEs) and small business owners affected by the novel coronavirus infection (COVID-19). However, concerns are rising mainly among secondary financial institutions. 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 totaled 73.4 trillion won, of which 50.9 trillion won were from private financial companies including commercial banks and secondary financial institutions. Among these, commercial banks accounted for 50 trillion won, and secondary financial institutions about 9 trillion won. The number of loan maturity extension applications totaled 238,000, with commercial banks excluding policy financial institutions recording 172,000 cases, and secondary financial institutions 24,000 cases.

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 30th. Given the ongoing economic downturn, the authorities are leaning toward an additional extension and are discussing this with the financial sector.

[Image source=Yonhap News]

If Interest Repayment Deferral is Extended... Concerns Over Opaque Standards for Soundness Assessment

Financial companies agree on extending loan maturities. However, especially among secondary financial institutions, there is difficulty accepting interest repayment deferrals. If interest repayment is also deferred, it becomes difficult to evaluate the borrower's creditworthiness through interest payments, raising concerns that the criteria for assessing soundness will become opaque. The amount of deferred interest is known to be insignificant compared to the amount of matured loans.

An official from the credit industry said, "We sympathize with extending loan maturities as small business owners continue to face difficulties due to the prolonged COVID-19 situation," but added, "If interest repayment is 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 repayment is postponed again, it could place a greater burden on the borrower," adding, "Those who can repay interest should do so to eliminate 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 terms, 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 added, "Life-support loans, where financial companies continuously extend loan terms 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 actual 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.