Savings Banks Begin Risk Assessment as Loan Maturity Extensions and Repayment Deferrals May Be Extended Again (Comprehensive)

Checking Income Decline and Reviewing Delinquency History
Industry: "The Scale of Defaults Is Not Yet a Cause for Concern"
Will Financial Support Policies Ending in Late September Be Extended Again?

[Asia Economy Reporter Song Seung-seop] It has been identified that savings banks are confirming the risks associated with loan maturity extensions and principal and interest repayment deferrals. As it has become difficult to identify default risks due to the financial authorities' successive extension and deferral measures, they have started self-management. There are concerns that if financial support policies are extended again, industry uncertainty will reach its peak.

According to the savings bank industry on the 6th, Savings Bank A is currently reviewing income reduction data of customers who have applied for extensions and deferrals. This is to understand how many small and medium-sized enterprises (SMEs) and small business owners will be unable to repay properly when the financial support policies end. Currently, all financial sectors are extending loan maturities and deferring principal and interest repayments for SMEs and small business owners who have suffered income losses due to COVID-19.

In the case of Savings Bank B, they are examining the past delinquency records of customers who requested extensions and deferrals. The more delinquency history a customer has, the greater the risk of default in the future. The purpose is to check and prepare for how many risky delinquent customers are among those who utilized the extension and deferral policies. A representative from this savings bank explained, "Since it is a policy of the financial authorities, if the conditions are met, maturity extensions and repayment deferrals are granted," but added, "It is difficult to manage risks, so we are confirming in advance as a precaution."

Fundamentally, there is no way to identify the potential default status of customers who have had their maturities extended or repayments deferred. Typically, the financial sector classifies loans into normal, precautionary, substandard, doubtful, and estimated loss categories. Loans overdue for more than three months are classified as 'substandard.' Substandard and lower non-performing loans are considered defaults. Loans with maturity extensions and repayment deferrals due to COVID-19 are classified as 'normal' loans. For banks that lent the money, it is difficult to accurately determine whether borrowers will be able to repay after the financial support measures end.

Nevertheless, indirect methods have been employed to confirm risks because the maturity extension and repayment deferral policies have been in place for a long time. The Financial Services Commission has been implementing related policies since April last year. Initially, it was planned to operate temporarily for six months, but as the COVID-19 situation continued, it was extended twice.

Savings banks that analyzed the risks believe that the risks from the extensions are not yet significant. A representative from a savings bank hinted, "Due to uncertainties, we have used various methods to examine the risks," and added, "The amount of loan maturity extensions and interest repayment deferrals accounts for a relatively small portion of the total loan amount."

Low Risk but If Financial Support is Extended Again, "Cannot Guarantee No Defaults"

According to the Financial Services Commission, as of June 25, the total amount used for loan maturity extensions and principal and interest repayment deferrals across all financial sectors is approximately KRW 204.4 trillion. KRW 192.5 trillion was used for maturity extensions, and KRW 11.7 trillion and KRW 0.2 trillion were used for principal and interest repayment deferrals, respectively.

However, if financial support measures continue for a long time, the savings bank industry also faces increasing uncertainty, so they cannot guarantee stability. The government and financial authorities have consistently hinted at the possibility of further extensions of the financial support measures, which are set to end at the end of September.

Financial Services Commission Chairman Eun Sung-soo said at the end of last month, "We hope to control the Delta (variant virus) by August as planned, but if not, there is a possibility of extension," and added, "There is about two months, so it will not be too late to observe the spread of COVID-19 until the end of August and then make a decision."

The government shares a similar stance with the financial authorities. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at the Emergency Economic Central Countermeasures Headquarters meeting held the day before, "We plan to review the extension of financial support measures such as loan maturity extensions and interest repayment deferrals, which are set to expire at the end of September, during September."

Lee Eok-won, First Vice Minister of the Ministry of Economy and Finance, also emphasized, "The maturity extension and repayment deferral measures support SMEs and small business owners temporarily facing difficulties due to COVID-19 while preventing financial sector insolvency," and added, "Active financial sector support for companies experiencing temporary difficulties leads to a virtuous cycle of 'preventing corporate bankruptcy → real economy recovery → suppressing increase in non-performing loans → enhancing financial company soundness.'"

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