"Partial Loan Interest Repayments Also Ignored" Next Year's 'Bad Debt Tsunami' Approaches (Comprehensive)

Postponement of Interest Repayment Ends, Wave of Distressed Companies' Defaults
Growing Concerns Over Triggering Financial Crisis

[Asia Economy Reporter Jo Gang-wook] The financial sector is expressing serious concerns about the extension of interest repayment deferrals for small business owners and small and medium-sized enterprises (SMEs) affected by the novel coronavirus infection (COVID-19). If they are unable to repay even the interest, these companies are essentially at the brink of collapse, making it highly likely that defaults will increase once the extension measures end.

Although the financial sector conveyed concerns about loan defaults and proposed a partial interest repayment plan to financial authorities, it was rejected. As a result, with delinquency rates and non-performing loan ratios rising, there are warnings that a "default tsunami" could hit after the measures end, potentially triggering a financial crisis.

Loans with Extended Maturities and Interest Total 76 Trillion Won... Concerns Over 'Time Bomb' Loans from Distressed Companies

According to financial authorities on the 27th, loans and interest with extended maturities across the entire financial sector from February to the 14th of this month amount to a total of 76 trillion won. Of this, the outstanding balance of loans with extended maturities is 75.8 trillion won (246,000 cases), and deferred interest amounts to 107.5 billion won (9,382 cases). In particular, the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?have about 35 trillion won in loans with extended maturities and deferred interest exceeding 30 billion won.

The financial sector agrees with additional support measures such as extending loan maturities amid the resurgence of COVID-19. However, the problem lies with the deferral of interest repayments. Given that loan volumes have already increased significantly due to COVID-19 financial support, extending the repayment deferral once more would accumulate loan burdens during that period. This is why concerns and dissatisfaction are growing over continuing to carry the "time bomb" loans of distressed companies that are likely to be at their limit.

A senior official from Bank A said, "Extending loan maturities is an unavoidable measure, but continuously deferring interest payments inevitably becomes a heavy burden for banks." He added, "Although the loan principal remains the same, interest is not forgiven but keeps accumulating, which will have negative consequences not only for financial institutions but, above all, for borrowers." He continued, "The banking sector focused on a plan to extend maturities while requiring partial interest repayments and repeatedly appealed this to the government, but it was not accepted," expressing regret.

Delinquent Borrowers Increase Amid Surging Loan Demand... Household and Corporate Delinquency Rates Rise Together in July

In reality, loan demand is surging among vulnerable groups such as low-credit borrowers and small business owners, but the number of borrowers unable to repay is increasing. The delinquency rates for households and corporations at the five major banks both rose in July. Corporate loan delinquency rates increased from 0.18?0.38% to 0.2?0.48%, and household loan delinquency rates also rose to 0.22?0.28% by the end of last month, showing an upward trend.

There are also criticisms that this measure merely extends the lifeline of uncompetitive distressed companies. The more "evergreen loans"?loans kept alive by borrowing to repay debt?increase, the more distorted the warning signals about the transmission of defaults become. Evergreen loans, where financial institutions continuously extend loan maturities even though borrowers no longer have the ability to repay, appear as performing loans on the surface but are actually non-performing loans.

A Bank B official said, "It's not that interest is not being paid, but it is literally deferred, so defaults could worsen by February next year." He added, "Before demanding interest repayment, there should have been an opportunity to select small businesses that are truly unable to repay."

A Bank C official also said, "It would be fortunate if normal transactions resume in the future, but companies already struggling have a high possibility of being zombie companies, and when the extension measures end, there could be a sudden burst of problems." He pointed out, "Instead of blindly postponing, a system that allows for a soft landing is needed."

"Extending Lifelines for Distressed Companies"... Borrowers' Credit Soundness in the Dark

The situation is similar in the secondary financial sector, including credit card companies. If interest repayment is also deferred, it becomes difficult to evaluate borrowers' creditworthiness through interest payments, raising concerns that the criteria for assessing soundness will be in the dark.

A representative from Card Company D said, "Extending loan maturities or deferring interest repayments ultimately increases uncertainty the longer it is postponed." He added, "From the card companies' perspective, funding costs inevitably rise, and it becomes harder to set aside provisions."

A representative from Card Company E also said, "We sympathize with extending loan maturities as small business owners continue to face difficulties due to the prolonged COVID-19 pandemic, but deferring interest repayments makes it impossible to understand the borrower's situation, complicating risk management."

Credit rating agencies have also pointed out concerns that so-called "evergreen loans," where financial institutions continuously extend loan maturities, could make it difficult to accurately assess the asset soundness indicators of financial institutions.

Lee Hyuk-jun, head of the Financial Evaluation Division at NICE Credit Rating, stated, "The extension of loan maturities and deferral of interest repayments for distressed borrowers is reminiscent of the refinancing loans during the 2003 credit card crisis."

He added, "Evergreen loans, where financial institutions continuously extend loan maturities even though borrowers no longer have the ability to repay, appear as performing loans on the surface but are actually non-performing loans. If such measures continue, the asset soundness indicators of financial institutions become meaningless, making it difficult for financial authorities and credit rating agencies to make accurate judgments that reflect the true condition of financial institutions," expressing concern.

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