Risk and Investment Losses Surge at Shinbo... "Proactive Management of Signs of Insolvency Needed"

'Small Business 2nd Financial Support' Guarantee Balance Up 90% in Half a Year
Support Scale Increases, Non-performing Loans and Subrogation Amounts Rise Sharply
Guarantee-linked Investments Show Declining Annual Returns, Enter Negative Territory
National Assembly Budget Office: "Risk Management and Early Signs of Default Must Be Identified"

[Asia Economy Reporter Song Seung-seop] The risk and investment loss scale of the Korea Credit Guarantee Fund (KODIT) are both increasing. This is due to the continuous relaxation of the limits and targets of the COVID-19 financial support program, as well as the deteriorating returns in the guarantee-linked investment sector. Warnings have been issued that crisis management and loss reduction measures are necessary to prevent future insolvency incidents.

According to the National Assembly Budget Office on the 11th, the guarantee balance of KODIT’s ‘Second Financial Support Program for Small Business Owners’ was 6.2282 trillion KRW as of last June. This is a sharp increase of 2.9593 trillion KRW (90.5%) in just half a year from 3.2689 trillion KRW at the end of last year.

The Second Financial Support Program for Small Business Owners is an emergency fund support program using a consignment guarantee method that processes guarantees and loans in a one-stop manner. When commercial banks are entrusted with loan screening and guarantee screening, KODIT supports guarantees for small business owners. It was implemented in May last year, with a goal to support a total of 10 trillion KRW by the end of this year.

During the same period, the amount of defaults and subrogation payments also increased about 4 to 5 times, recording 40.9 billion KRW and 21.2 billion KRW respectively. Although not at a dangerous level, considering the program was implemented in May last year, the financial sector views the rapid surge in default amounts as excessively steep. The National Assembly Budget Office expects that if the current trend continues, the default rate and subrogation rate will rise even more sharply in the third year when repayments begin.

KODIT has continuously relaxed the requirements, limits, and targets to broadly implement the program. At the time of implementation, the loan limit was 10 million KRW, but it was raised to 20 million KRW in September last year. Also, companies that benefited from the first small business owner program with loans within 30 million KRW can receive overlapping support. Earlier this year, the guarantee fee rate, which was 0.9% for 5 years, was reduced to 0.3% for the first year and 0.9% for years 2 to 5. An additional support program of 10 million KRW was also newly established for small business owners renting premises in restricted industries.

KODIT’s Guarantee-Linked Investment Returns Fall into Negative Territory

Guarantee screening is also simplified. KODIT has directly conducted document collection and qualification reviews during general guarantee screening, broadly assessing creditworthiness, repayment ability, representatives, financial soundness, and future soundness. In contrast, this program only verifies simple matters such as loan delinquency at financial institutions or tax arrears. On-site investigations conducted during general guarantee screening were also omitted.

Additionally, in the case of the COVID-19 Response Securitization Company Guarantee (P-CBO Guarantee), the ratio of subordinated securities acquisition has been lowered compared to the initial introduction. P-CBO refers to a system where a securitization specialist company acquires the underlying assets issued by a company and issues securitized securities, and KODIT provides guarantees to help sell them to institutional investors. KODIT requires the bond-issuing company to acquire a certain ratio of subordinated securities to strengthen the issuer’s responsibility. If this ratio decreases, the scale that KODIT must bear in the event of future insolvency incidents increases.

KODIT’s guarantee-linked investment business, which directly invests in companies, has also become a warning subject as losses have increased. The investment support scale increased significantly from 35 billion KRW in 2016 to 59.1 billion KRW last year, but the annual return rate decreased every year from 3.33% to -1.97%.

The National Assembly Budget Office suggested, "Since the expansion of support limits and targets and simplified guarantee screening may increase guarantee defaults, risk management such as combining management consulting for small business owners is necessary," and "It is necessary to identify signs of insolvency in companies included in the P-CBO guarantee." It also advised, "Since investment losses are expanding, it is necessary to enhance the screening system and prepare measures such as expanding joint investments with the private sector."

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