23% of COVID-19 Impacted Businesses Supported by Loans, 'No Credit Rating for Individual Entrepreneurs'

Bank Loans to COVID-19 Affected Companies from March to September Total 19.5 Trillion Won
4.4 Trillion Won Injected into Small Businesses
Self-Employed Increasingly in Debt... Calls to "Raise to Level 3 and End Quickly and Decisively"

[Asia Economy Reporter Kim Eunbyeol] As the number of confirmed cases of the novel coronavirus infection (COVID-19) surges again, self-employed business owners are facing a harsh winter. Commercial banks have lent a total of 20 trillion won to 'COVID-19 affected companies' in accordance with the Bank of Korea's support criteria, and nearly half of this amount was loaned to individual business owners. A significant portion of these individual business owners are small-scale self-employed without credit ratings, raising concerns about potential loan defaults in the future. Although the government and the Bank of Korea plan to continue credit supply until the COVID-19 situation calms down, self-employed business owners remain uneasy. The longer the COVID-19 spread continues, the more their debt accumulates. This is why some argue that social distancing measures should be escalated to end the pain 'short and intense.'

According to the Bank of Korea on the 14th, the loan amount provided by commercial banks to COVID-19 affected companies was about 19.5 trillion won from March to September this year. Since the end of February, the Bank of Korea has supported COVID-19 affected companies through commercial banks using the Financial Intermediation Support Loan (Geumjungdae). A budget of 13 trillion won was allocated solely for supporting COVID-19 affected companies, and 11.5 trillion won (88.1%) has been disbursed so far. Geumjungdae is a system where the Bank of Korea supplies funds to financial institutions at ultra-low interest rates to encourage an increase in loans for small and medium-sized enterprises and self-employed business owners.

Nearly half (48.8%) of the total loan amount, 9.5 trillion won, was loaned to individual business owners. Breaking down individual business owner loans by borrower credit rating, 4.4 trillion won was lent to unrated borrowers without credit ratings. This means that about 23% of the 19.5 trillion won in loans supporting COVID-19 affected companies was loaned to 'unrated individual business owners.' Unrated individual business owners are those who have no transaction history with banks or whose assets and sales do not meet certain criteria, so banks manage them separately outside their internal credit rating system (grades 1 to 10). Most of them are small-scale small business owners such as SOHO (Small Office Home Office).

[Image source=Yonhap News]

Including Geumjungdae, loans to self-employed businesses by all deposit banks are also increasing sharply. According to the 'Loans by Industry of Deposit-taking Institutions' data announced by the Bank of Korea on the 2nd, as of the end of September, the outstanding loans to non-corporate businesses (self-employed) by deposit banks reached 387.9 trillion won, the highest since related statistics began in the fourth quarter of 2018. Compared to the end of the second quarter, it increased sharply by 9.1 trillion won. Although this is less than the increase of 21.2 trillion won in the second quarter, nearly 10 trillion won in loans are still being issued each quarter. A commercial bank official said, "Loans to self-employed businesses increased significantly in the first half of this year, then seemed to calm down as COVID-19 was controlled, but recently, as social distancing levels have risen, more people have been inquiring about loans," adding, "When social distancing levels rise, loans will naturally increase."

Self-employed business owners were hit hard by the COVID-19 crisis this year. When COVID-19 spreads rapidly, social distancing levels are raised, causing sales shocks, and when distancing levels are lowered, there is slight recovery, repeating this pattern multiple times. Private consumption has continued to decline, with year-on-year decreases of -4.8% in the first quarter, -4.0% in the second quarter, and -4.4% in the third quarter.

Given this situation, some argue that raising social distancing to level 3 to quickly contain the spread of COVID-19 is the answer. If the spread continues, the shock to self-employed business owners will increase, potentially only increasing loans. However, raising to level 3 would also cause significant damage to the macroeconomy. The Bank of Korea estimated in its 'Monetary and Credit Policy Report' that if social distancing is raised to level 3, private consumption would decrease by 16.6% and gross domestic product (GDP) would shrink by 8%.

◇Terminology Explanation

◆Unrated Borrower= A borrower with no transaction history with banks or whose assets and sales do not meet certain criteria, managed separately outside the bank's internal credit rating system (grades 1 to 10).

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