PickPick Collapsing SME... Banks Anxious Without 'Poor Quality Gauge'

72 Trillion Won in Commercial Bank Loan Maturity Extensions
Concerns Rise Amid Surge in Corporate Bankruptcy Filings

[Asia Economy Reporter Kim Hyo-jin] Concerns are rising in the banking sector as the extension of loan maturities for small and medium-sized enterprises (SMEs) and small business owners affected by the novel coronavirus infection (COVID-19) accumulates. Since interest repayment deferral measures have been implemented concurrently, banks are in a situation where they do not even have a gauge to measure defaults.

The surge in corporate bankruptcy filings this year further heightens anxiety. This implies that loans with extended maturities could surface as large-scale defaults once the extension measures end.

According to financial authorities on the 17th, from February to the 6th of this month, the maturity extensions of loans provided by commercial banks to SMEs and small business owners affected by COVID-19 amounted to approximately 252,000 cases, totaling 71.9 trillion won. This far exceeds the new loans executed during the same period (763,000 cases, 45.5 trillion won).

The financial authorities have extended the loan maturity extension and interest repayment deferral measures, originally scheduled to end in September, until March next year. This means that the risk of delinquency and defaults due to insufficient repayment capacity will remain concealed until March next year. The bank loan delinquency rate in September, which paradoxically recorded an all-time low of 0.30% despite the COVID-19 impact, reflects this situation.

Meanwhile, the number of corporations and individuals entering bankruptcy proceedings due to financial difficulties has significantly increased this year. According to the Court Administration Office, 815 corporate bankruptcy filings were submitted to bankruptcy divisions of courts nationwide from January to September, the highest number since statistics began in 2013. Individual bankruptcy filings also surged by about 16% over two years, from 32,113 cases in January-September 2018 to 37,450 cases during the same period this year.

The Bank of Korea recently forecasted in its 'Financial Stability Report' that the number of marginal firms (companies unable to pay even interest with annual profits) will sharply increase this year compared to last year due to the COVID-19 shock.

Rapid Increase in Provisions for 'Blind Defaults'

In the process of extending loan maturity and interest repayment deferral measures, banks have requested financial authorities to lift the interest repayment deferral. This is based on the judgment that it is necessary to manage loan soundness by monitoring interest repayment trends. The scale of interest repayment deferral is overall only in the hundreds of billions of won, so it is assessed to have little impact on profitability.

A bank official explained, "The only tool to assess loan soundness is interest repayment," adding, "If interest cannot be properly paid, the ability to repay principal is even weaker. In that case, wouldn't it be better for both banks and borrowers to promptly start management?" It is known that some in the banking sector have recently requested financial authorities to consider this proactively.

However, financial authorities are reportedly maintaining a firm stance, fearing that COVID-19-related financial support might shrink. A financial authority official pointed out, "If banks start sorting out borrowers based on interest repayment ability, the solid foundation of COVID-19 financial support that has been ongoing since early this year could collapse."

The banking sector is actively building provisions in preparation for such 'blind defaults.' As of the third quarter of this year, provisions of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?amounted to 1.9336 trillion won, more than double the 811.4 billion won recorded in the same period last year.

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