Junggiyeon "Bad Bank Creation Needed to Solve Small Business Debt Issues"

Headquarters of the Small and Medium Business Venture Institute.

[Asia Economy Reporter Donghyun Choi] An analysis has emerged suggesting that policies such as debt relief and adjustment through the establishment of a dedicated stepping-stone fund (bad bank) for small business owners, strengthening support for business closure and restart, and operating an integrated adjustment organization are necessary for the fundamental resolution of small business owners' debt problems. A bad bank refers to a special fund or bank (organization) that plays a role in managing non-performing loans and supporting debt restructuring.

The Korea Institute of Startup & Entrepreneurship Development (hereinafter KISSED) announced on the 31st a report titled "Practical Policy Measures to Solve Small Business Owners' Debt Problems" containing these contents. In the report, KISSED pointed out, "Domestic small business owners are struggling to cover interest costs due to deteriorated business conditions caused by COVID-19," and "The increase in small business owners' debt is not simply due to the COVID-19 crisis but is a structural problem that forces reliance on borrowing."

In the case of domestic small business owners, a significant portion of startup costs depends on borrowing, so if they close their businesses carrying excessive debt, there is a high possibility of falling into bad credit status. Especially due to the recent COVID-19 pandemic, if they close their businesses, the debt that must be repaid at once is considerable, leading to a vicious cycle where businesses continue to survive on loans without closing despite poor performance.

Although there is a program by the Credit Recovery Committee supporting debt restructuring for small business owners who close their businesses, even with support, the average loan size for small business owners is 330 million KRW, resulting in a principal and interest burden of up to 2.5 million KRW per month. Considering that 54.8% of small business owners are elderly people in their 50s and 60s, it is not easy to seek new opportunities after business closure.

KISSED emphasized that extending loan maturities and deferring repayments are not fundamental solutions, and to solve small business owners' debt problems, three policies are necessary: ▲ promoting debt relief and debt restructuring through the establishment of a bad bank ▲ supporting business closure and restart ▲ operating an integrated adjustment organization.

First, KISSED proposed a policy to promote the closure of marginal small business owners through acquiring non-performing loans of small business owners and debt restructuring by establishing a bad bank with government capital and contributions from commercial banks. In particular, they argued that if the fund establishment is combined with the recently discussed 50 trillion KRW scale loss compensation fund, widespread ripple effects are expected.

They also suggested the need for support measures including institutional design that allows debt relief and adjustment without causing delinquency when small business owners apply to the bad bank, expanding support for business closure costs, strengthening linkage between business closure and education support, and enhancing retraining education for elderly small business owners, covering non-financial areas as well.

Furthermore, although the 'Emergency Economic Central Countermeasures Headquarters' was launched to respond to the COVID-19 pandemic, it is unclear whether it will continue after the new government takes office, so they mentioned the need to operate a government-wide integrated adjustment organization that continuously focuses on small business owners' debt problems.

Senior Researcher Jeonghwan Lee of KISSED said, "The integrated adjustment organization needs to set explicit goals and deadlines to improve small business owners' business conditions and alleviate debt burdens," adding, "It is necessary to set a goal within the next government to reduce the proportion of self-employed people by facilitating the smooth exit of marginal small business owners to about 15%, the European average, or about 17%, the OECD average."

Meanwhile, on the same day, Ahn Cheol-soo, chairman of the Presidential Transition Committee, also ordered active consideration of the bad bank as a practical measure to realize President-elect Yoon Seok-youl's pledge to promote emergency-style debt restructuring during the foreign exchange crisis. Accordingly, discussions related to the establishment of the bad bank are expected to accelerate rapidly in the future.

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