Extending Loan Maturity and Postponing Repayment... Now They Want to Tweak Credit Scores? (Comprehensive)

"Minimizing Loan Condition Disadvantages When Credit Rating Drops"

[Asia Economy Reporter Park Sun-mi] Financial authorities' pressure to protect small and medium-sized enterprises (SMEs) and small business owners affected by COVID-19 from credit rating downgrades and to minimize disadvantages such as loan conditions even if ratings fall is causing deep concerns in the financial sector about having to revise credit evaluation models.

According to financial authorities on the 7th, banks, insurance companies, and policy financial institutions must fully reflect the recovery potential when evaluating the credit ratings of SMEs and small business owners starting from the 1st of next month. It will also be mandatory to establish and apply standards that minimize loan condition disadvantages if there are no defaults such as delinquencies or capital erosion, even if the credit rating declines. This measure was prepared with the intention of preventing SMEs and small business owners, whose operations temporarily worsened due to COVID-19, from bearing excessive burdens such as credit rating downgrades.

The financial sector complains that extending the COVID-19 loan maturity extensions and repayment deferrals until September, combined with easing credit ratings and corresponding loan conditions, will force the financial sector to bear the burden of private sector defaults. There is criticism that populist policies aimed at currying favor are becoming increasingly serious.

An official from Bank A said, "The directive to fully reflect recovery potential in non-financial evaluations or the final credit rating calculation process essentially means that banks must bear the risk of defaults," adding, "Since it requires changes to the existing credit evaluation application methods, preparing the standard guidelines itself is a considerable burden."

Source: Financial Services Commission

There is also a view that financial authorities' interference in banks' credit rating evaluations is uncomfortable.

An official from Bank B pleaded, "This measure by financial authorities is like asking to prevent the credit ratings of SMEs and small business owners from falling by considering temporary factors arising from the special situation of COVID-19." He added, "Although it is stated that the recovery potential of small business owners should be sufficiently reflected in the non-financial evaluation section, unlike financial evaluations that include objective financial figures such as sales and debt ratios, non-financial evaluations involve many non-quantitative aspects such as industry and management risks and credibility, which is tantamount to instructing manipulation of credit evaluations."

Concerns Over Side Effects of Deferred Defaults

There are also voices expressing concerns about side effects arising from differences in credit evaluation models among financial institutions and variations in the level and type of information about borrowers, which could lead to discrepancies in detailed application standards among banks.

An official from Bank C pointed out, "There could be a flexible standard applied to SME and small business credit evaluations depending on the bank," adding, "From a bank's perspective, the key factor to assess the possibility of borrower default is whether interest payments are being made normally, but the extension of COVID-19 loan maturity and repayment deferral measures makes even this evaluation less objective." He warned that providing a pretext for relief to those with downgraded credit ratings could only defer defaults, causing adverse effects.

Financial authorities dismissed concerns that these measures to support small business owners and SMEs could impose excessive burdens on financial institutions.

They argued that reflecting recovery potential in credit evaluations reasonably considers temporary business deterioration caused by the special situation of COVID-19, which could actually lead to a more accurate assessment of borrowers' repayment ability and may not result in a burden on financial institutions. A Financial Services Commission official said, "Minimizing loan condition deterioration through adjustments such as additional interest rates for borrowers whose credit ratings have declined but who are not in default enables continuous business operations and ongoing transactions with financial institutions," adding, "It will not act as an excessive burden on financial institutions."

A financial sector official emphasized, "The authorities' explanation assumes a scenario where no default occurs for the borrower," and stressed, "For banks, managing risk to prevent defaults is more important than loan execution."

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