[Q&A] Financial Services Commission "Monitoring Signs of Insolvency... Reflecting Soundness Classification Including Provisioning"

"Response Through Dedicated Service Counters and Sector-Specific Support Centers"

Kwon Dae-young, Director of the Financial Industry Bureau at the Financial Services Commission (Photo by Yonhap News)

[Asia Economy Reporter Kwangho Lee] The Financial Services Commission has decided to extend the loan maturity extension and repayment deferral for small and medium-sized enterprises (SMEs) and small business owners affected by COVID-19 by an additional six months until September this year. After the extension ends, the 'Five Principles of Soft Landing Support' will be applied to allow borrowers to choose various long-term and installment repayment methods according to their circumstances.

The five principles are ▲providing optimal repayment plan consulting considering the borrower's situation ▲granting a repayment period longer than the deferral period when principal and interest are repaid in installments after deferral ▲maintaining the total amount of interest accrued during the deferral period regardless of repayment method or period ▲allowing early repayment without prepayment penalties if the borrower wishes to repay earlier than the original plan ▲and allowing the borrower to make the final decision on repayment method and period after consulting and negotiating.

Kwon Daeyoung, Director of the Financial Industry Bureau at the Financial Services Commission, stated, "We plan to closely monitor and promptly respond to inquiries and field difficulties arising during the implementation of loan maturity extension, repayment deferral applications, and soft landing measures through dedicated desks within the Financial Supervisory Service's 'COVID-19 Financial Support Special Counseling Center' and sector-specific support centers."

He added, "We reaffirmed that financial companies will not be penalized for active measures to support SMEs and small business owners affected by COVID-19, provided there is no intentional or gross negligence."

Below are the questions and answers.

- Companies unable to pay interest are essentially insolvent (marginal) companies; does the extension merely defer insolvency?

▲ Companies that received repayment deferrals due to COVID-19 should be distinguished from companies unable to pay interest under normal economic conditions. The loan maturity extension and repayment deferral guidelines target companies experiencing temporary cash shortages due to a sharp drop in sales caused by COVID-19. These companies are fundamentally expected to gradually repay interest over time once COVID-19 subsides and the economy returns to normal.

- Could the loan maturity extension and repayment deferral lead to increased financial sector insolvency if the economic downturn prolongs? Is the financial authority pursuing a shortsighted measure to avoid immediate difficulties?

▲ We acknowledge concerns about the possibility of financial sector contagion from real sector insolvencies given delayed economic recovery and high future uncertainties. Fortunately, due to steady efforts to improve soundness, current indicators of domestic financial companies' soundness are favorable. The financial authorities will continue to monitor financial sector soundness and encourage sufficient provisioning to enhance loss absorption capacity.

- Does repayment deferral eliminate the ability to detect insolvency?

▲ Insolvency signs can be monitored through various indicators beyond interest repayment, such as business suspension or closure and credit card usage. In fact, individual banks monitor monthly whether borrowers with repayment deferrals are operating normally, their credit card usage, loans from other institutions, and trade arrears, reflecting these in provisioning and soundness classification.

- If the loan maturity extension and repayment deferral period exceeds one year, does the financial company's asset soundness classification change? Are these recognized as non-performing assets?

▲ Existing legal interpretations regarding asset soundness classification of loans with maturity extension and repayment deferral (including those under soft landing measures) remain applicable. However, this does not mean that deferred loans must be classified as normal unconditionally. Individual financial companies can adjust classifications and provision sufficiently if signs of insolvency are detected.

- Is allowing borrowers to choose repayment methods and periods under the five principles of soft landing support an excessive burden on financial companies?

▲ The soft landing support principles aim for financial companies and borrowers to consult and agree on an optimal repayment schedule tailored to each borrower's situation. Financial companies provide various installment repayment options suitable for the borrower, and ultimately, the borrower, who best understands their business and cash flow, autonomously selects the method, enabling responsible repayment. This approach also facilitates soundness management and aligns with the purpose of repayment deferral from the financial companies' perspective.

- Can the maturity be extended indefinitely under the soft landing measures?

▲ Since indefinite debt continuation can be burdensome for borrowers, opinions suggest a repayment period about two to three times the deferral period is appropriate. However, given the significant economic uncertainty caused by COVID-19, the soft landing support principles allow maturity extension levels to be determined according to each borrower's repayment capacity. Within the principles, no specific method or period will be restricted.

- Will the loan maturity extension and repayment deferral measures end in September?

▲ Whether to end the measures will be decided after comprehensive consideration of quarantine conditions, the real economy, and financial stability, through consultation with the financial sector. We plan to establish a policy decision system for the phased normalization of COVID-19 response measures, periodically providing market participants with the authorities' situation assessments and response directions.

- What support is available for borrowers who have difficulty repaying after the deferral ends?

▲ For borrowers struggling to repay after the deferral ends under the soft landing measures, policy financial institutions' soft landing support programs will be activated, and financial sector programs such as refinancing loans will be actively utilized.

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