Warning Signs of Self-Employed Business Failures... Banks' Additional Provisions Total 5.4 Trillion Won (Comprehensive)

Possibility of Defaults After September End of Loan Extension and Interest Repayment Deferral
Additional Bank Provisions of 5.4 Trillion Won... Equivalent to 60% of Last Year's Earnings

[Asia Economy Reporter Kiho Sung]Choi Woo-cheol (45, pseudonym), who runs a restaurant in Seoul, is struggling with management difficulties as sales plummeted due to COVID-19. Three years after inheriting the business from his mother, he laid off employees last year and is now struggling with his wife to cook and serve in the hall. He is barely holding on, forced to endure the upcoming bank loan repayment scheduled for the second half of last year, but even this is not easy. Mr. Choi said, "The government has allowed principal and interest repayment and interest deferral, so I am holding on for now, but they say support will end in September, and I don't know what to do," adding, "If the current situation continues, I honestly have no confidence that I will be able to repay the bank interest."

One out of five individual business owners who took out bank loans is at high risk of insolvency. This is due to the prolonged COVID-19 pandemic causing a sharp decline in sales and an increase in debt for interest payments and living expenses, severely worsening their financial condition.

Although indicators appear very stable, the risk of insolvency among small business owners, masked by maturity extensions and interest repayment deferrals, is widely expected to intensify after support measures end in September. Accordingly, an analysis shows that the amount of additional provisions banks need to accumulate in preparation for the post-September period could reach 5.4 trillion won. This is equivalent to 62% of the net income earned by banks last year.

According to the report titled "The Risk of Insolvency of Small Business Owners and Self-Employed Hidden by Maturity Extensions and Interest Repayment Deferrals and the Distortion Level of Asset Soundness Indicators of Banks and Savings Banks," published by Korea Ratings on the 29th, the proportion of loans showing signs of insolvency among all individual business loans at the end of last year was estimated at 20.4% for banks and 27.3% for savings banks. This means one out of five bank loans and one out of four savings bank loans are insolvent.

Considering that the ratio of loans classified as watch or below for individual business loans at banks and savings banks was 0.6% and 19.6%, respectively, at the end of last year, the proportion of loans showing signs of insolvency is very high. Tae-young Ahn, Senior Researcher at Korea Ratings' Financial Research Division 1, pointed out, "Since asset soundness classification indicators appear with a lag and the classification of loans with maturity extensions and interest repayment deferrals has been maintained since April last year, loans with maturity extensions and interest repayment deferrals are likely classified as normal because the application conditions exclude reasons such as principal and interest arrears, capital erosion, or business closure."

Additional Bank Provisions Needed: 5.4 Trillion Won... About 60% of Last Year's Earnings

Accordingly, it is pointed out that banks and savings banks need to build up proactive provisions for loans showing signs of insolvency in preparation for the end of government financial support policies. The report calculated that as of the end of last year, the additional provisions needed for loans showing signs of insolvency were 5.4 trillion won for banks and 75.3 billion won for savings banks. This corresponds to 61.8% and 16.2% of net income at the end of last year, respectively.

Furthermore, with market interest rates rising recently, especially long-term rates, and the prolonged COVID-19 pandemic, the debt burden on small business owners is expected to expand further. According to the report, assuming the most conservative scenario where interest rates rise by 1 percentage point and the average debt of small business owners increases by 100 million won each, the additional provisions needed for banks and savings banks would increase to 6 trillion won and 104.8 billion won, respectively. This corresponds to 69.2% and 22.6% of net income at the end of last year.

Senior Researcher Ahn warned, "If the loan maturity extension and interest repayment deferral measures end by the end of September, from the fourth quarter of this year, delinquent loans will be sequentially classified as watch or substandard, likely leading to an increase in loan loss expenses from next year onward," adding, "If insolvency materializes, the recognition of temporary losses could cause significant shock not only to individual banks and savings banks but to the entire financial industry."

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