[Exclusive] 'Small Businesses and SMEs on the Brink'... Government's 'Assumed Debt' Surges

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Last year, Mr. Kim (in his 40s) opened a new barbecue restaurant in Incheon, but within just one year, he entered personal rehabilitation proceedings. He had taken out more than 300 million won in loans for interior renovations and other expenses, but as his losses deepened, he could no longer even pay the interest. Kim lamented, "I even sold my car to pay employees' salaries and suppliers, but now I can't keep the business running," adding, "The future looks even more uncertain."

With the economic slowdown, the number of small business owners and small- and medium-sized enterprises unable to repay their debts is increasing, which is in turn raising the burden on guarantee institutions. Over the past five years, the amount of debt repaid on behalf of small business owners has reached 1.3 trillion won, and in just the first half of this year, the amount paid on behalf of businesses for unpaid accounts receivable reached 50 billion won. However, the amount recovered falls far short of this, raising concerns about the deterioration of fiscal soundness.

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According to data received by the office of Choo Kyungho, a member of the National Assembly's Political Affairs Committee, from the Korea Credit Guarantee Fund on September 24, the amount of "entrusted guarantee" delegated payments for small business owners reached 123.5 billion won in the first half of this year. The delegated payment rate, compared to the guarantee balance (1.4212 trillion won), stood at 17.5%. Under this system, the Korea Credit Guarantee Fund repays the bank on behalf of the borrower when the borrower fails to repay the principal.

The entrusted guarantee for small business owners was temporarily introduced in May 2020 to support those struggling with business difficulties due to the COVID-19 pandemic. In 2020 and 2021, 3.2927 trillion won and 4.1377 trillion won were supplied, respectively.

As the business environment for small business owners has not improved, the burden on the Korea Credit Guarantee Fund continues to grow. Although the scale of delegated payments in the first half of this year was lower than in 2023 (507.4 billion won) and 2024 (472.9 billion won), the total for the full year is projected to surpass 2022 (183.1 billion won). This demonstrates that the funding difficulties triggered by COVID-19 have persisted for over five years. The cumulative amount of delegated payments over the past five years has reached 1.3721 trillion won. The volume of non-performing loans continues to accumulate, with the default rate surging from 5.2% in 2022 to 19.1% in the first half of this year. In contrast, the amount recovered through subrogation claims after delegated payment was only 92.9 billion won.

The amount of accounts receivable (unpaid balances) that guarantee institutions have repaid on behalf of small- and medium-sized enterprises and small business owners who failed to pay for goods and services on time is also on the rise.

The delegated payment amount (insurance payouts) for accounts receivable insurance by the Korea Credit Guarantee Fund reached 32.2 billion won as of June this year, marking a 21% increase compared to the same period last year. For the first half of the year, this is the largest amount since 2021 (33.6 billion won). The delegated payment amounts for the first half of the year were 24.9 billion won in 2022, 29.8 billion won in 2023, and 26.5 billion won in 2024, but this year saw a sharp increase once again.

Accounts receivable insurance is a system that compensates for losses when a small- or medium-sized enterprise is unable to collect payment for goods sold. An increase in delegated payments indicates that more selling companies are unable to collect payments from buyers, and thus the guarantee institutions are covering more of these debts. Most of these buyers are small business owners or small- and medium-sized enterprises.

A similar product, accounts receivable credit insurance from SGI Seoul Guarantee, is also seeing a rapid increase in delegated payments. According to data submitted by SGI Seoul Guarantee to Representative Choo's office, the amount of delegated payments for accounts receivable credit insurance in the first half of this year was 16.183 billion won. This figure is already close to last year's record high of 18.749 billion won since 2015. At this rate, the amount for this year is likely to surpass last year's record. The delegated payment amounts for accounts receivable credit insurance were 7.62 billion won in 2022, 11.065 billion won in 2023, and 18.749 billion won in 2024, showing a steady increase over the past four years. Combining the Korea Credit Guarantee Fund and SGI Seoul Guarantee, the total for just the first half of this year reaches 48.383 billion won.

The problem is that as delegated payments increase, loss ratios are also soaring. The loss ratio for accounts receivable insurance at the Korea Credit Guarantee Fund was 107.9% in the first half of this year, far exceeding last year's 89%. This essentially means the operation is running at a deficit. An official from the Korea Credit Guarantee Fund explained, "Unlike private insurance companies, our operations are more public in nature," adding, "We aim to maintain the loss ratio at around 100%."

The loss ratio for accounts receivable credit insurance at SGI Seoul Guarantee reached 44.3% in the first half of this year, the highest in nine years since 2016 (47.3%). After remaining in the 10% range since 2020 (15%), the loss ratio jumped to 27.1% last year and climbed even higher this year. A higher loss ratio means that, despite the increase in delegated payments, the amount recovered from buyers through subrogation claims remains low. An official from SGI Seoul Guarantee stated, "Due to the delayed economic recovery, the number of corporate rehabilitation filings and the delinquency rate at financial institutions remain high, leading to increases in both delegated payments and loss ratios," adding, "We are working to stabilize the loss ratio by strengthening risk management by industry sector."

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