"'Corona Loans' Likely Extended Again... Worries Deepen Over the 'Debt Rebellion'"

Financial Authorities "Linked to COVID-19 Situation"
Considering Extension Preparation Procedures, Decision Expected This Month
Last Year's Loan Bond Growth Rate 10%...Widening Gap with Economic Growth Rate

[Asia Economy reporters Kangwook Cho and Hyojin Kim] Financial authorities have settled on a plan to further extend the principal and interest repayment moratorium for loans to small business owners and small and medium-sized enterprises (SMEs) due to the prolonged COVID-19 pandemic. The total amount of loan maturity extensions across banks and secondary financial institutions reaches 126 trillion won. Concerns are growing within and outside the financial sector that if the deferred loan principal and interest continue to increase, a ‘debt backlash’ similar to the 2003 credit card crisis and the 2011 savings bank crisis could occur.

Authorities Set to Extend Loan Maturity and Interest Repayment Moratorium

According to the financial sector on the 12th, financial authorities have internally decided to extend the loan maturity extension and interest repayment moratorium once more due to the third wave of COVID-19 infections. The current financial support measures are, in principle, inevitably linked or dependent on the spread of COVID-19 and quarantine conditions, according to the authorities.

A financial authority official explained, "Even if the current highest level of social distancing is lowered by one step, it is unlikely that markets such as self-employment will dramatically improve," adding, "It is difficult to suddenly loosen the comprehensive support measures."

Another official from the financial authorities said, "If banks assess borrowers’ principal repayment ability based on their interest repayment capacity, many small business owners could suddenly face pressure," and added, "The decision to extend the measures will carefully balance the burden banks may bear, their ability to cope, and the potential damage to society and the economy if the measures are halted."

The financial authorities plan to reach a conclusion through discussions with the banking sector by next month. Considering the preparation process such as system work for extending the measures, it is expected that a certain direction will be established as early as this month. Once the behind-the-scenes discussions are finalized, the financial authorities and banks are expected to meet to confirm the support policy and proceed with related procedures.

According to the financial authorities and the Korea Federation of Banks, the scale of loan principal and interest maturity extensions for SMEs and small business owners in the banking sector sharply increased from 70 trillion won in July and 90 trillion won in September to 109.1509 trillion won in November last year. This corresponds to about 5.8% of the total bank loans (1,875 trillion won) as of the end of the third quarter last year. During the same period, the amount of interest repayment moratorium was 95 billion won, exceeding 100 billion won by the end of December at 102 billion won. Including policy financial institutions and secondary financial institutions, the total amount of maturity extensions reached 126 trillion won as of the 8th of this month.

Concerns Over ‘Bad Debt Tsunami’... Excess Liquidity ‘Bubble’ Similar to Financial Crisis

The problem arises after the maturity extension ends. The possibility of a ‘bad debt tsunami’ where the increasing deferred principal and interest repayments come due all at once cannot be ignored. In particular, the rapidly rising loan asset growth rate in the financial sector is considered a key variable. According to the Korea Institute of Finance, the loan asset growth rate of commercial banks at the end of last year is estimated at 10%. This is nearly double the 5-6% range maintained from 2017 to 2019. Meanwhile, South Korea’s economic growth rate has been declining annually from 3.2% in 2017 to 2.7% in 2018, 2.0% in 2019, and sharply dropped to -1.0% last year.

When the gap between economic growth rate and loan asset growth rate widens, excess liquidity creates a ‘bubble’ in financial and asset markets. For this reason, some point out that the gap between last year’s economic growth rate and financial sector loan asset growth rate resembles aspects of the 2008 global financial crisis.

Lee Hyuk-jun, head of the Financial Evaluation Division at NICE Credit Rating, criticized, "Last year’s financial sector performance, which showed the lowest-ever non-performing loan ratio in a real economy that is shrinking due to the financial support measures’ illusion, is neither rational nor sustainable."

He added, "The government, companies, and households have increased debt excessively relative to income after the COVID-19 pandemic, and if the bubble expands excessively, it will turn into a financial crisis catastrophe, causing painful consequences for companies and households, including financial institutions."

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