[Loan Default Warning] Impact of COVID-19 Intensifies... Increase in Default Rates on Shinbo Guarantees

New Loan Guarantee Default Rate at 3.3% in June This Year
Up 1.3 Percentage Points Year-on-Year
Borrowers' Repayment Ability Declines Due to High Interest Rates and Economic Recession

The default rate of bank loans guaranteed by the Korea Credit Guarantee Fund (KODIT) for small and medium-sized enterprises (SMEs) and self-employed individuals has been soaring this year. The risk of guaranteed loans, which increased during the COVID-19 pandemic period due to high interest rates and economic recession continuing since last year, is now becoming more pronounced.

According to data on the "2018-2023 General Guarantee Default Status" obtained by Asia Economy from KODIT on the 1st, the default rate for KODIT's general guaranteed loans as of June this year was 3.3% (annualized). This is a 1.3 percentage point increase compared to last year (2.0%). The default rate, which had declined from the 3% range in 2018-2019 to 2.4% in 2020 and 2.0% in 2021 and 2022, is now rising sharply again. Here, default refers to cases where borrowers are delinquent on principal or interest payments, have temporarily closed or shut down their businesses, or have filed for rehabilitation or bankruptcy. A higher default rate means that the amount KODIT must repay on behalf of borrowers is also increasing accordingly.

The amount of defaulted loans has already surpassed 1 trillion KRW in the first half of this year. As of June, out of the total guarantee balance of 61.4906 trillion KRW, the default amount was 1.0007 trillion KRW. At this pace, the scale of defaults for the entire year is likely to exceed the levels of previous years. The figures were 1.334 trillion KRW in 2020, 1.1604 trillion KRW in 2021, and 1.2556 trillion KRW in 2022, consistently maintaining just above 1 trillion KRW.

The situation becomes even more severe when focusing on small business owners. According to data submitted by KODIT to Kim Hee-gon, a member of the National Assembly’s Political Affairs Committee from the People Power Party, the default rate for the "Small Business Owner Entrusted Guarantee," which allows small business owners to borrow up to 40 million KRW from banks with KODIT guarantees, reached 9.17% as of June this year. It is expected to rise to 14.2% by the end of this year. The default amount is also projected to reach 655.5 billion KRW.

The amount of loans repaid by KODIT on behalf of borrowers (subrogation payments) also reached 738 billion KRW (4,275 cases) in the first half of this year. The subrogation payments were 1.36 trillion KRW (8,677 cases) in 2020, 1.2116 trillion KRW (7,116 cases) in 2021, and 1.1525 trillion KRW (6,517 cases) in 2022. It is highly likely that the total for this year will also exceed previous years.

The rise in default rates is due to borrowers’ declining repayment ability amid last year’s rapid interest rate hikes and prolonged economic recession, which increased the burden of principal and interest repayments. A KODIT official explained, “From 2020 to 2022, when COVID-19 was spreading, low interest rates continued and the government’s active liquidity support led to decreases in default rates and subrogation payments.”

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, “The continuous expansion of defaults reflects the overall increase in risk levels in the financial market. Strengthening soundness management immediately could create bigger problems, so authorities need to carefully assess the situation and manage loans with high risk going forward.”

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