The COVID Paradox... Number of Companies Showing Signs of Financial Distress Decreases by 53 This Year

Signs of Financial Distress in SMEs Decrease After 3 Years

[Asia Economy Reporter Kim Hyo-jin] The number of companies facing potential insolvency and subject to restructuring has somewhat decreased this year.

This is interpreted as a result of large-scale financial support related to the novel coronavirus disease (COVID-19) that has sustained companies.

The Financial Supervisory Service (FSS) announced on the 28th that 157 companies were selected as signs of insolvency in the '2020 Regular Credit Risk Assessment' conducted by creditor banks. This is 53 fewer companies than last year.

The number of companies rated C in credit was 66, an increase of 7 from the previous year, while companies rated D decreased by 60 to 91.

Among large corporations, 4 were selected as companies showing signs of insolvency, down 5 from the previous year. Among small and medium-sized enterprises (SMEs), 153 were selected, a decrease of 48 compared to the previous year.

The number of large corporations showing signs of insolvency continues to decline, and the increasing trend among SMEs, which had continued since 2017, has been broken after three years.

The FSS explained, "The decrease in the number and proportion of D-rated companies appears to be due to the decline in delinquency rates and the decrease in companies filing for rehabilitation, resulting from liquidity support effects by the financial sector related to COVID-19."

The FSS added, "The difficulties caused by COVID-19 were sufficiently considered during the credit risk assessment process, and it is estimated that the recovery trend in corporate performance from the third quarter was also reflected."

The credit risk assessment for large corporations, which was usually conducted in the first half of the year, was postponed to the second half this year and conducted together with SMEs, excluding temporary impacts caused by COVID-19 during the evaluation.

The amount of credit extended by the financial sector to companies showing signs of insolvency is 2.3 trillion KRW, with banks accounting for 1.8 trillion KRW, or 78.3%.

When reclassifying asset soundness for loans to companies showing signs of insolvency, the estimated additional loan loss provisions expected to be accumulated by banks is about 235.5 billion KRW.

Considering the loss absorption capacity of domestic banks, the FSS expects that the impact of companies showing signs of insolvency on bank soundness will not be significant.

The FSS plans to promptly promote restructuring such as workouts for early business normalization of companies showing signs of insolvency and to guide creditor banks to strengthen post-management for companies that have not applied for workouts or similar measures.

Additionally, for companies experiencing temporary management crises, creditor banks will be encouraged to actively support them through rapid financial support and pre-workout programs.

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