Extension of COVID Loan Maturity and Interest Repayment Deferral... Encouraging Long-Term and Installment Repayment (Comprehensive)

Considering Measures to Support a Soft Landing in the Financial Sector
Planning to Encourage Various Long-Term and Installment Repayment Options to Allow Borrowers to Choose Repayment Methods They Can Afford

[Asia Economy Reporter Park Sun-mi] The financial sector's maturity extension and repayment deferral measures, implemented to support small and medium-sized enterprises and small business owners struggling due to COVID-19, will be further extended. Financial authorities plan to encourage various long-term and installment repayment options so that borrowers can choose repayment methods they can manage.

On the 3rd, the Financial Services Commission announced in its 2021 Financial Industry Policy Direction that it will announce a smooth transition plan for the maturity extension and repayment deferral measures currently in place across the entire financial sector to overcome COVID-19 by the end of this month. The application period for maturity extension and repayment deferral was originally until the end of September last year but was extended once until the end of March. So far, the total amount of maturity extensions for lump-sum repayment loans across the financial sector is 116 trillion KRW (350,000 cases), principal repayment deferrals for installment repayments amount to 8.5 trillion KRW (55,000 cases), and interest repayment deferrals amount to 157 billion KRW (13,000 cases).

Kwon Dae-young, Director of the Financial Industry Bureau at the Financial Services Commission, explained at a briefing that "Considering the COVID-19 quarantine situation, real economy trends, and the soundness of financial companies comprehensively, it was judged that extending the measures is inevitable. We plan to prepare and announce specific plans after sufficient consultation with stakeholders including the financial sector, SMEs, and small business owners."

He added, "Especially, even when normalizing the deferral measures, we are considering preparing smooth transition support plans in the financial sector so that the repayment burden on borrowers does not concentrate all at once. After the repayment deferral ends, we plan to encourage various long-term and installment repayment options so that individual borrowers can choose repayment methods they can manage."

Financial Services Commission: COVID-19 Situation Unfavorable,
Maturity Extension and Repayment Deferral Measures Inevitable

For borrowers experiencing liquidity difficulties despite maturity extension and repayment deferral, policy financial institutions will operate smooth transition support programs, and financial sector's own programs such as refinancing loans will also be actively utilized.

Temporary financial regulatory relief measures currently in place to respond to COVID-19, such as LCR regulation relaxation (until the end of March) and loan-to-deposit ratio regulation exemption (until the end of June), are also being reviewed for extension considering economic conditions. Even when normalizing due to improvements in the COVID-19 situation, the intention is to provide stakeholders with sufficient time to adapt.

Additionally, to ensure sound management of financial companies during the COVID-19 situation including maturity extensions, capital adequacy will be actively promoted through provisions for loan loss reserves.

Director Kwon stated, "For banks (and holding companies), the principle is to pay dividends within 20% of profits, but the dividend payout ratio is expected to decrease by about 5 percentage points compared to last year. Under normal circumstances, we would not intervene in banks' dividend policies, but now is a time when capital adequacy is necessary to activate and maintain banks' functions to overcome the COVID-19 crisis."

He added, "The recommendation to refrain from bank dividends is not unique to Korea; similar recommendations have been made to banks in Europe, and international credit rating agency Moody's has given a positive evaluation on this. Although no specific recommendations have been made to mutual finance and secondary financial sectors, many are under financial holding companies, so we believe management and shareholders will decide at an appropriate level."

Building Refinancing Loan Infrastructure, Activating Mid-Interest Loans, Strengthening Interest Rate Reduction Request Rights

The Financial Services Commission plans to focus on building refinancing loan infrastructure, activating mid-interest loans, and strengthening the interest rate reduction request rights this year to enhance regional and low-income financial intermediation functions.

First, as the statutory maximum interest rate is lowered (from 24% to 20%), it announced that it will induce the financial industry to lower and adjust mid-interest rates (weighted average, maximum interest rate) after March. To prevent a decrease in loans to mid- and low-credit borrowers due to interest rate reductions, additional incentives (e.g., additional loan-to-deposit ratio) will be provided to savings banks that handle many mid-interest loans.

Supervision will also be strengthened to ensure internet-only banks can innovatively expand loans to mid- and low-credit borrowers in line with the law and the purpose of their introduction. Director Kwon pointed out, "Despite the introduction purpose that internet banks should increase accessibility to mid- and low-credit borrowers, the actual results have been insufficient. For example, the proportion of grade 4 borrowers is over 40% in banks, but only about 20% in internet banks."

From October, a refinancing loan infrastructure will be established that allows switching to lower interest rate loan products through a non-face-to-face one-stop process. This platform will mediate loan product transfers among multiple financial institutions within a single system, similar to the Account Info system. Based on surveys after March, efforts will be made to promote disclosure, publicity, and institutional improvements related to the interest rate reduction request rights. By the end of the year, these rights will also be introduced to the mutual finance sector.

Meanwhile, the Financial Services Commission will also strengthen financial competitiveness by introducing a continuous suitability screening system for major shareholders of savings banks this year, tightening entry (registration) requirements for specialized credit finance companies to block unqualified entrants, and minimizing the risk of unsound business practices. Furthermore, it will continuously promote financial policies that enhance public experience, such as activating the 'Dormant Assets Recovery 3-Set' and improving convenience in subscribing and unsubscribing to content related to books and videos.

A Financial Services Commission official stated, "We will promptly initiate legislative and amendment procedures for legal matters and swiftly implement regulatory and practice improvements. Going forward, we will continue efforts to overcome COVID-19, ensure financial stability, enhance the dynamism of the financial industry, and improve public experience through ongoing communication and feedback with financial consumers, the financial sector, and experts."

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