Only 115 Trillion Won in COVID Loans Due... Seeking a Soft Landing Exit

Support Loans for SMEs and Small Businesses, Grace Period Ends in March Next Year
Financial Authorities Hint at Extension... Financial Sector Also Agrees on Necessity
Calls for Risk Diversification Through Long-Term Principal and Interest Installments

[Asia Economy Reporter Jo Gang-wook] Financial authorities are reportedly leaning toward effectively extending the debt repayment moratorium measures for small and medium-sized enterprises (SMEs) and small business owners, which are set to expire in March next year, raising concerns within the financial sector. Although the delinquency rate of domestic banks has only slightly increased despite the prolonged COVID-19 pandemic, this is pointed out to be a 'visual illusion.' Some argue that even if loan maturities are extended, interest payments should be made to disperse risk.

According to the Financial Services Commission on the 24th, the total amount of loans extended for maturity in the financial sector to support SMEs and small business owners affected by COVID-19 from February to early this month, a period of about 10 months, exceeds 115 trillion won. Newly issued loans surpassed 91 trillion won. Among these, the amount of maturity extensions at commercial banks was 77.7 trillion won, and new loans amounted to 48.7 trillion won, accounting for the majority. During this period, including policy financial institutions and the secondary financial sector, the total amount of new loans and loan maturity extensions in the entire financial sector reached 206.8 trillion won, with guarantee support at 54.3 trillion won, totaling 261.1 trillion won in support.

Financial authorities are currently deliberating on whether to end the COVID-19 financial support measures for SMEs and small business owners. Originally, the measures were to expire in March next year after one extension from March this year, but recent COVID-19 resurgence has intensified calls for a smooth exit strategy. Financial Services Commission Chairman Eun Sung-soo also hinted at the possibility of re-extension on the 14th, stating, "A smooth exit plan that allows time to adapt is necessary." The authorities plan to gather opinions from the financial sector, industry, and experts starting January next year to prepare a smooth exit plan for the financial support measures.

The financial sector also agrees on the necessity of such a smooth exit. However, there are opinions that while loan maturities should be extended, the financial support measures should encourage a smooth exit by adopting a method of long-term installment repayment of principal and interest. There are also voices advocating that, depending on the repayment ability of SMEs, corporate improvement procedures (workouts) or rehabilitation processes should be conducted. The argument is that SMEs with repayment ability should repay the principal and interest in long-term installments, while those without should undergo restructuring.

However, skepticism predominates regarding the extension of interest payment moratoriums. It is understood that the current scale of interest repayment moratoriums in the financial sector approaches 1 trillion won. About half of this amount is accounted for by the five major commercial banks. There is concern that if interest repayment moratoriums continue to sustain marginal companies, a 'bad debt tsunami' phenomenon could occur, where latent bad debts suddenly surface all at once. It is reported that commercial banks conveyed these concerns by participating remotely in the 'COVID-19 Response Policy Evaluation Meeting' chaired by the Financial Services Commission Chairman on the 21st.

According to the Financial Supervisory Service, as of the end of October, the delinquency rate on won-denominated loans at domestic banks was 0.34%, up 0.04 percentage points from the end of the previous month. Compared to the same month last year, it is 0.12 percentage points lower. However, this figure does not reflect the delinquency levels of SMEs and self-employed individuals pushed to the limit. Due to loan maturity extensions and interest payment moratorium measures, unpaid interest is classified as 'normal repayment,' causing this 'visual illusion.'

A financial sector official said, "Borrowers who are unable to repay continue to have their loan terms extended, so on the surface, these are normal loans, but in reality, they are non-performing loans. To prevent bad debts from transferring to banks and to ensure a smooth exit, restructuring of marginal companies sustained by extending interest payment moratoriums is now necessary."

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