Last Week's 3% Loan, Today 2%... 'Bokbulbok Loan' Frustrates Small Business Owners

Small Business Owners Tight on Money Must Pay Up to 200,000 Won More Annually, About 17,000 Won Monthly in Interest Within Days

[Asia Economy Reporter Kim Jong-hwa] "When I heard that a 2% loan was available under the same conditions, I asked the bank if I could switch my loan, but they said refinancing was not possible since I had already taken out the loan."

Park Jun-hyun (57, pseudonym), who runs a small manufacturing business in the Seoul metropolitan area, expressed frustration over a 1 percentage point difference in loan interest rates that occurred within just a few days. Due to financial difficulties caused by the COVID-19 pandemic, Park recently took out a 20 million KRW small business management stabilization loan from a branch of Industrial Bank of Korea. The interest rate was around 3%, which was a reasonable condition for him.

However, the problem arose when the government announced on the 9th that the same type of loan would be offered at a 2% interest rate. The Ministry of SMEs and Startups announced that starting from that day, through the Small Enterprise and Market Service (SEMAS), it would provide the '3rd Small Business Management Stabilization Fund' with a 2% interest rate, a loan limit of 20 million KRW, and a loan period of 5 years (2 years grace period, 3 years equal principal repayment).

Park had recently received the 2nd round of the small business management stabilization loan under the same limit and period but at a 3% interest rate, meaning he ended up using a loan product that was 1 percentage point more expensive by just a few days. As a result, Park now has to pay up to 200,000 KRW more annually, or about 17,000 KRW more monthly, in interest.

Upon hearing the news, Park inquired at the bank but was told, "Since the loan has already been executed, refinancing is not possible." He also considered repaying the 20 million KRW loan he recently took and reapplying for the 3rd small business management stabilization loan, but was told, "It is uncertain whether the loan would be approved again," leaving him with no solution.

Park said, "I could understand if it were a private product, but it is hard to comprehend such differentiation when the support comes from government funds," adding, "I am trying to save every penny, even reducing heating while running the factory in the cold, so this feels unfair."

The small business management stabilization fund support began in February when the damage to small business owners due to COVID-19 became serious. During the 1st round, loans of up to 100 million KRW were provided at a low interest rate of 1.5% through SEMAS and several commercial banks including Industrial Bank of Korea, and the prepared 14.1 trillion KRW was fully exhausted within two months.

The 2nd round of support, conducted only through commercial banks in May with a total scale of 10 trillion KRW, had interest rates of 3-4% and a loan limit of up to 20 million KRW. Due to criticism that the interest rates were more than double those of the 1st round, banks recalculated and adjusted the minimum interest rates considering costs and expenses, but interest rate differences ranged from 0.29 to 1.42 percentage points depending on the bank.

The interest rate differences arose from the banks' interest rate application methods and differences between high-credit and low-credit borrowers. Banks such as Kookmin Bank, Industrial Bank of Korea, and Daegu Bank adopted a fixed interest rate method, applying the same rate for the 5-year term (2 years grace period, 3 years equal principal repayment). Generally, fixed-rate loans, which are less responsive to changes in the base rate, have higher interest rates than variable-rate loans.

On the other hand, banks like NongHyup adopted a variable interest rate method, allowing borrowers to choose among the rates of negotiable certificates of deposit (CD), financial bonds, or KORIBOR. For low-credit borrowers, all banks set the highest interest rate uniformly at 4.99%.

Commercial banks explain that this is an unavoidable aspect. "There are clear criteria, and they cannot be overturned," they say. The Ministry of SMEs and Startups also stated, "While the situation is unfortunate, refinancing cannot be provided," adding, "Since those who have taken other loans can also receive overlapping loans, individuals need to find solutions according to their circumstances."

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