Increase in Collateralized Loan Guarantees... Banks Slightly Lower Interest Rates

[Asia Economy Reporter Park Sun-mi] As the new coronavirus infection (COVID-19) resurges, movements to support small and medium-sized enterprise (SME) loans in the banking sector are becoming active, leading to an increase in the scale of guarantee-backed loans. However, there are criticisms that the interest rates on guarantee-backed loans provided by banks to SMEs do not differ significantly from those of secured loans or unsecured loans, despite the fact that there is no collateral management burden.

According to the financial sector on the 1st, the Korea Credit Guarantee Fund (KODIT), which is responsible for SME guarantees, issued new guarantees worth 7.6 trillion won to the six major banks?Kookmin, Woori, Shinhan, Hana, Nonghyup, and Industrial Bank of Korea?from January to July this year. This is about a 10% increase compared to 5.9 trillion won during the same period last year. In particular, due to COVID-19 special guarantees, the scale of new guarantees with a guarantee ratio of over 95% surged fourfold from 290 billion won a year ago to 1.24 trillion won as of the end of July. The proportion of new guarantees with a 95% guarantee ratio also rose significantly from 4.9% a year ago to 16.3% currently.

The increase in KODIT’s new guarantee volume indicates that guarantee-backed loans in the banking sector are actively progressing. To overcome the economic crisis caused by the prolonged COVID-19 pandemic, KODIT has early expanded and is executing the supply scale of new guarantees in the second half of the year. Since guarantee-backed loans are loans raised using guarantee certificates from guarantee institutions such as KODIT as collateral, banks bear almost no risk management burden. This means that even if banks lower interest rates on guarantee-backed loans for SMEs, it does not impose a burden on their profits and losses.

Despite this situation, the interest rates on guarantee-backed loans provided by banks do not differ significantly from other loan interest rates. According to the August disclosure by the Korea Federation of Banks, the average interest rates on guarantee-backed loans for SMEs at the six major domestic banks range from 2.39% to 2.97%.

Even for loans with a 100% guarantee ratio, where banks bear no risk at all, three commercial banks apply interest rates exceeding 2%. Compared to secured loans backed by real estate or other collateral, which have average interest rates around 2.54% to 2.90%, the interest rates on guarantee-backed loans are not much different. Unsecured personal loans, which reflect only the individual's income level and credit rating without guarantee or collateral, also have interest rates ranging from 2.09% to 2.89% for credit ratings between 1 and 3, which is similarly close to the interest rates on guarantee-backed loans.

Banks are focusing more on enhancing the convenience of applications by utilizing 'non-face-to-face' methods rather than actively lowering interest rates on guarantee-backed loans to support SMEs. Shinhan Bank introduced a non-face-to-face service on its mobile application SOL on the 31st of last month, allowing users to apply for and contract the Seoul City secondary guarantee loan. After checking loan applications, limits, interest rates, and other loan conditions on SOL, the loan is executed upon signing an electronic document. Hana Bank also launched the 'Hana One Q Guarantee Foundation Loan' service, enabling small business owners to obtain guarantee-backed loans non-face-to-face without visiting the bank.

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