Financial Services Commission: "Loan Extensions and Interest Deferrals Are Not Populism... Economy Will Worsen If Neglected"

Financial Sector Criticism on Coercion and Delayed Poor Management Refuted Point by Point
"Financial Sector Also Actively Participates, Remembering Past Government and Public Support"

Eun Sung-soo, Chairman of the Financial Services Commission (Photo by Yonhap News)

[Asia Economy Reporter Kim Hyo-jin] As criticisms such as the extension of loan maturities and the six-month extension of interest repayment deferrals related to the novel coronavirus infection (COVID-19) being labeled as populism or potentially delaying the financial sector's management of non-performing loans continue to arise, the Financial Services Commission (FSC) has come forward to refute these points one by one, stating that the measures aim to "prevent large-scale bankruptcies and the resulting vicious economic cycle."

On the 30th, the FSC expressed this position through a press reference material in a '10 Questions and Answers' format.

Regarding criticisms that the extension of the interest repayment deferral deadline is a typical populism where the government forces the financial sector's hand to take credit, the FSC explained, "Due to the prolonged COVID-19 situation, difficulties for small and medium-sized enterprises (SMEs) and small business owners have intensified, and considering the actual results of interest repayment deferrals, the burden on the financial sector is not very large." The FSC added, "We understand that the financial sector has actively participated in this additional extension measure, recalling the various supports received from the government and the public during past financial crises."

As of the 14th, the FSC has tallied a total of 246,011 cases amounting to 75.7749 trillion KRW in loan maturity extensions and 9,382 cases amounting to 107.5 billion KRW in interest repayment deferral measures implemented by the financial sector. The FSC recently decided to extend the temporary measures for loan principal repayment maturity extensions and interest repayment deferrals implemented by the financial sector from the end of next month to March 31 of next year.

Financial Services Commission

Within the financial sector, there are ongoing remarks to the effect that "borrowers who cannot even pay interest risk falling into the quagmire of non-performing loans, so it is more reasonable to reveal the risks so that both banks and borrowers can manage them." If further loan maturity extensions are inevitable, it is necessary to end the interest repayment deferral measures as originally planned to "sort out viable and non-viable companies," thereby proactively managing potential non-performing loans of borrowers and the entire financial sector.

In response, the FSC stated, "Companies receiving interest repayment deferrals due to COVID-19 should be distinguished from companies unable to pay interest under normal economic conditions," explaining, "Companies receiving interest repayment deferrals due to COVID-19 are those experiencing temporary cash shortages caused by a sharp decline in sales." The FSC further said, "This is necessary to prevent the possibility of a vicious cycle where leaving companies facing liquidity crises due to external shocks unattended triggers large-scale bankruptcies and worsens the overall economy."

The FSC also mentioned, "Since May, the number of interest repayment deferral applications has sharply decreased, and side effects have not been significant, so the financial sector itself has proposed broadly extending loan maturity extensions and interest repayment deferrals." This emphasizes that the recent measures were not unilateral decisions by the authorities. The FSC added that many countries overseas, including the United States, the United Kingdom, Spain, Italy, Canada, Australia, South Africa, and Singapore, are also implementing interest repayment deferral measures.

"Interest Repayment Deferral Side Effects Are Not Significant, Financial Sector Proposed Extension First"
Concerns Over Transmission of Real Economy Non-Performing Loans to Financial Sector: 'Full Agreement, Continuous Monitoring'
"Second Support Program for Small Business Owners to Be Reviewed for Improvements with Relevant Ministries"

Nevertheless, the FSC stated, "We fully agree with concerns about the possibility of non-performing loans in the real economy spreading to the financial sector, given the delayed economic recovery and high future uncertainties." Regarding these concerns, the FSC explained, "Due to steady efforts to improve soundness, current indicators of domestic financial institutions' soundness are favorable," adding, "We plan to continuously monitor financial sector soundness and encourage sufficient provisioning and enhancement of loss absorption capacity." As of the end of June, the loan delinquency rate of domestic banks was 0.33%, down 0.09 percentage points from 0.41% in the same month last year. The Basel Committee on Banking Supervision (BIS) capital adequacy ratio was 14.72%, exceeding the regulatory ratio (10.5%) by more than 4 percentage points.

In response to criticisms that the 'ammunition' for financial support may have been exhausted during the first half of the year, the FSC said, "We are seriously aware of and closely monitoring the negative impact COVID-19 may have on the economy," adding, "There remains a reserve of support capacity, including the second support program for SMEs and small business owners (balance of 9.4 trillion KRW) and various funds and resources for market stabilization, which will be prioritized as a safety net in case of future liquidity shortages or market instability."

Regarding criticisms that the second support program for small business owners has shown poor performance, possibly due to design issues such as higher interest rates compared to the previous program, the FSC said, "There is a possibility of urgent funding demand increasing again due to concerns over a resurgence of COVID-19," and "We plan to review potential improvements to the program together with relevant ministries."

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