"Manage Risks"... Warning Lights for Guarantees and Investments Lit at Shinbo (Comprehensive)

'Small Business 2nd Financial Support' Guarantee Balance Up 90% in Half a Year
Support Scale Increases, Bad Debt and Subrogation Amounts Rise Sharply
Guarantee-Linked Investments Show Declining Annual Returns, 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 ‘Small Business Second Financial Support Program’ was 6.2282 trillion KRW as of 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 Small Business Second Financial Support Program 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 system was implemented in May last year, the financial sector views the rapid rise 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 Small Business First Program with loans within 30 million KRW can receive overlapping support. Earlier this year, the guarantee fee rate, which was 0.9% for five years, was reduced to 0.3% for the first year and 0.9% for the second to fifth years. An additional support program of 10 million KRW was also newly established for small business tenants in restricted industries.

Guarantee screening is also simplified. For general guarantee screening, KODIT has directly collected submission documents and reviewed eligibility requirements, broadly assessing creditworthiness, repayment ability, representatives, financial soundness, and future soundness. In contrast, this program only checks simple matters such as loan arrears at financial companies or tax delinquencies. On-site investigations conducted in general guarantee screening were also omitted.

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

Additionally, the COVID-19 response securitization company guarantee (P-CBO guarantee) has also expanded its support targets and scale. P-CBO refers to a system where a securitization specialist company purchases underlying assets issued by a company and issues securitized securities, with KODIT providing guarantees to help sell them to institutional investors.

Initially, P-CBO support targets were medium-sized and large enterprises. Currently, the support target has expanded to small and medium enterprises, and even credit finance companies among financial businesses are allowed. The limit per company was 70 billion KRW for medium-sized enterprises and 100 billion KRW for large enterprises, but these have increased to 105 billion KRW and 150 billion KRW respectively.

In particular, the ratio of subordinated securities acquisition has decreased compared to the initial introduction. KODIT requires bond-issuing companies to acquire a certain ratio of subordinated securities to strengthen their own responsibility. If this ratio decreases, the burden KODIT must bear in case of future insolvency increases. At the system’s introduction, the subordinated securities acquisition ratio for medium-sized enterprises was 1.5?4.5%, but it has dropped to 0.3?3.9%. For large enterprises, it decreased from 3.0?9.0% to 1.2?5.4%.

KODIT’s guarantee-linked investment business, where it directly invests in companies, has also become a warning subject as losses increase. In 2016, when the investment support scale was 35 billion KRW, the annual investment return rate was 3.33%. Although the investment amount has increased every year to 59.1 billion KRW last year, the return rate has fallen to -1.97%.

KODIT explained that investment losses occurred as the IPOs of companies originally scheduled were delayed. The worsening business conditions of investee companies due to COVID-19 are also cited as causes of increased defaults. Unlike private venture capital (VC), KODIT supports early-stage startups, regional companies, and manufacturing companies that are excluded from the investment market, which also entails higher investment risks.

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 small business management consulting is necessary," and "It is necessary to identify signs of insolvency in companies included in the P-CBO guarantee." It also advised, "As investment losses are increasing, 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.