[Reporter’s Notebook] Further Extension of Interest Payment Deferral Risks Creating a Boomerang Effect of 'Zombie Companies'

Is Turning a Blind Eye to Temporarily Avoid the Crisis Really the Best Solution?

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[Asia Economy Reporter Park Sun-mi] "We will continue to provide financial support to small business owners and small and medium-sized enterprises (SMEs)."

At the Financial Risk Response Team meeting of the Financial Services Commission held on the 12th amid the prolonged COVID-19 pandemic, Vice Chairman Do Gyu-sang emphasized once again the continuous financial support for small business owners and SMEs.

This statement firmly rules out the possibility of a blanket extension as financial authorities are currently discussing with the banking sector the extension of the loan principal repayment maturity and interest payment deferral program for small business owners and SMEs, which was originally set to expire at the end of March. Since the spread of COVID-19 has not been completely contained, financial authorities are in a situation where they cannot easily decide to remove the life support despite concerns over a surge in loans.

The key issue lies in whether to separate and distinguish between SMEs experiencing temporary liquidity crises and non-viable marginal companies with structural insolvency, and how long to apply the loan principal repayment maturity extension and interest payment deferral program under the same conditions. Companies that continue to fail to pay interest are in a marginal situation, and merely postponing interest payments without restructuring ultimately fosters moral hazard and leads to the creation of zombie companies, which causes even greater insolvency.

The fact that the chairmen of the five major financial holding companies have unanimously expressed since the beginning of the year that tailored restructuring capable of selectively responding to insolvent companies is necessary rather than blanket support reflects concerns about the increase in marginal companies and the resulting expansion of risks.

The real economy is on a worsening path. According to the monthly court statistics report, the number of corporate (business) bankruptcy filings received by courts nationwide from January to November last year was 984 cases. Including December figures, it exceeded 1,000 cases, marking the highest ever since statistics began in 2013. This year, due to the economic shock caused by COVID-19, the number of marginal companies is inevitably expected to increase further.

Although the authorities judge that the scale of interest deferral, which stood at around 100 billion KRW as of the end of the previous month, does not pose a significant burden on the financial sector, if corporate insolvency spreads, the resulting credit risk will be entirely borne by the financial sector. Rather than turning a blind eye to temporarily avoid the crisis, it is the way to save both SMEs enduring the COVID-19 era and the financial sector to quickly eliminate those that cannot be rehabilitated and prepare countermeasures to allow a fresh start.

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