Forecast, Up to 45 Billion Repayment Deferral... "No Problem" vs "Risk of Insolvency" (Summary)

Forecast: Extension of Repayment Deferral for Debtors Unable to Repay Normally Since March Last Year
Up to 2,500 People and 45 Billion KRW Subject to Extension... "Inevitable Measure, Improvement in BIS Ratio and Delinquency Rate"

[Asia Economy Reporter Song Seung-seop] The Korea Deposit Insurance Corporation (KDIC) has decided to further extend the repayment deferral for financially vulnerable debtors in consideration of the impact of COVID-19. As a result, it is expected that up to approximately 45 billion KRW in debt repayment deferrals will be possible. This measure is interpreted as aligning with the government and financial authorities' COVID-19 financial support policies.

KDIC announced on the 23rd that it will implement this policy as an additional measure to the repayment deferral initiated in March last year. Under the previous measure, KDIC deferred repayment for about 250 people, amounting to approximately 23 billion KRW. With this additional measure, repayment deferral will be possible for up to about 2,500 people and 44.8 billion KRW. The target debtors are those who borrowed money from bankrupt financial companies managed by KDIC and are currently under installment repayment agreements through debt restructuring. The deferral period is one year, and existing users can also apply for additional repayment deferral.

This plan came about 20 days after the Financial Services Commission announced the extension of loan principal repayment deadlines and interest repayment deferral measures. The Financial Services Commission extended these temporary measures, which were initially introduced until this month due to the prolonged COVID-19 situation, for an additional six months. As of the end of January, loan principal extensions totaled 121.1602 trillion KRW, principal repayment deferrals were 903.17 billion KRW, and interest repayment deferrals were 163.7 billion KRW.

A KDIC official explained, "If left unattended in difficult situations, the risk of insolvency becomes greater. This is to help borrowers get through the storm for now." Financial Services Commission Chairman Eun Sung-soo also emphasized the necessity of the deferral measures during a press meeting last month, stating, "(The risk) is not zero, but considering COVID-19, this is the answer."

Experts Warn of "Illusory Improvement in Soundness Indicators and Risk of Default"

Regarding concerns that repeated extensions increase the risk of insolvency when repayment deadlines arrive, financial authorities believe there is no significant problem. This is because domestic financial companies have increased their provisions, and the total capital ratio (BIS) and delinquency rates remain favorable. According to the Financial Supervisory Service, as of the end of last year, the BIS ratio of domestic banks was 15%, up 1.09 percentage points from the previous year, exceeding the regulatory level of 10.5%. The delinquency rate was 0.28%, the lowest level ever recorded since statistics began. KDIC also explained, "The maximum amount is 44.8 billion KRW, and except for one corporate loan of 18 billion KRW, the amount is small."

However, some warn that the improvement in soundness indicators is an illusion. Due to the financial authorities' legal interpretation that loans with extended maturities are not considered non-performing, loans of debtors unable to repay principal and interest are included as normal loans. Oh Jung-geun, president of the Korea Financial ICT Convergence Society, pointed out, "People who cannot even pay interest will find it difficult to repay even after COVID-19 ends. Yet, these loans are classified as normal credit, hiding non-performing loans."

There are also concerns that insolvencies may surface if economic recovery is delayed and interest rates rise. Professor Lee Jung-hee of the Department of Business Administration at Chung-Ang University warned, "The delinquency rate is a lagging indicator that appears late in a recession. There is a risk of increased defaults due to variables such as economic conditions and interest rate changes."

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