"Increase in Zombie Companies Due to COVID-19 Shock... Small Financial Firms Vulnerable to Risk"

"If Corporate Insolvency Spreads, Associated Credit Risks Will Transmit to the Financial Sector"

[Asia Economy Reporter Park Sun-mi] Due to the impact of COVID-19, the number of marginal companies is highly likely to increase, raising concerns that small financial companies in the secondary financial sector, which are vulnerable to risks, need to take preemptive measures by expanding loan loss provisions.

On the 2nd, Senior Research Fellow Koo Jeong-han of the Korea Institute of Finance stated that the economic shock caused by COVID-19 is likely to increase the number of marginal companies. Considering that the deterioration of corporate financial soundness was inevitable due to sales declines caused by the outbreak of COVID-19 in 2020, the number of marginal companies is bound to increase compared to the previous year.

According to the recent regular corporate credit risk evaluation results announced by creditor banks, the number of companies subject to detailed evaluation, which can be considered marginal companies, expanded by 201 from 3,307 in 2019 to 3,508 in 2020. Research Fellow Koo explained, "As the number of companies showing potential signs of insolvency increases, if an ad hoc evaluation is conducted in 2021 in addition to the regular evaluation, the number of companies selected for restructuring in 2021 is expected to increase. In a survey targeting small business owners, 22.2% responded that they expect their business to be in a closed state following the resurgence of COVID-19, and 50.6% said they are maintaining their business but are considering closure."

He added, "If corporate insolvency spreads, the resulting credit risk will be transmitted to the financial sector, so financial companies need to prepare accordingly. In particular, some small financial companies in the secondary financial sector may be significantly affected by the insolvency of small and medium-sized enterprises, so it is judged that preemptive expansion of loan loss provisions is necessary."

Research Fellow Koo emphasized, "It is important that corporate restructuring is carried out selectively and swiftly after the corporate credit risk evaluation. Corporate restructuring needs to be pursued in a differentiated manner according to the size of the company and the cause of restructuring after selective target selection. Additionally, preparations should be made for a possible surge in credit recovery support applications from individual business owners due to the COVID-19 shock, and consumer protection against voice phishing targeting financially vulnerable groups should be strengthened."

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