South Korea will pursue aggressive debt restructuring for self-employed and small business owners who took out loans to stay afloat during the COVID-19 pandemic and have since fallen far behind on repayments. The government said it would provide support in stages — from debt relief to credit recovery and business turnaround — while easing the added repayment burden from rising interest rates.
The government announced the plan, titled measures to support vulnerable borrowers ahead of a period of rising interest rates, at a meeting of the emergency economic headquarters held jointly with a meeting of economy-related ministers on the 28th. The measures were prepared in anticipation that the Bank of Korea's recent policy rate increase and rising market rates could heighten the financial burden on small and mid-sized companies, small business owners and borrowers with mid-to-low credit scores.
Of the 358.7 trillion won ($265 billion) in loans extended to individual business owners by banks and policy lenders between 2020 and 2023, 154.7 trillion won ($114 billion), or 43.1%, remains unpaid. The share of loans overdue by three months or more stands at 4.1%. The government said it would push aggressive debt restructuring for self-employed and small business owners who received financial support during the pandemic and strengthen stage-by-stage support covering debt relief, credit recovery, business turnaround and the rebuilding of operating capacity.
The government will also clear existing long-overdue debt. Through the New Leap Fund, it will buy up and write off or restructure as much as possible of the 1.1 trillion won ($814 million) held by securitization companies and up to 4.5 trillion won ($3.3 billion) held by private lending firms, covering claims of 50 million won ($37,000) or less that have been in arrears for seven years or more. Long-overdue claims of 20 years or more held by state-run financial institutions will be written off in a single batch. The Export-Import Bank of Korea will write off 16.2 billion won ($12 million) in special claims from small and mid-sized companies that have gone unpaid for years — its first such batch write-off — and will simultaneously extinguish the obligations of joint surety guarantors.
The specific scope of the pandemic loan restructuring and the level of debt forgiveness have yet to be determined. The government plans to design further details — including how far in arrears unpaid pandemic loans must be to qualify and how much principal will be forgiven — and release a concrete plan within a month. It will also prepare measures linking debt restructuring to a return to economic activity, such as employment and starting a new business, rather than ending with the restructuring itself.
Support will also expand for small and mid-sized companies and small business owners who repaid their debts as scheduled. The Small Enterprise and Market Service will offer borrowers with clean repayment records a 0.3 percentage point rate discount and raise their lending cap by 200 million won ($148,000). The Industrial Bank of Korea's Hope Dream loan program for small business owners will grow to 3 trillion won ($2.2 billion) from 1.5 trillion won ($1.1 billion) this year, and the Korea Credit Guarantee Fund will widen its guarantee-fee discount on special guarantees to 0.4 percentage point from 0.3 percentage point.
The government will also increase low-rate funding and support for refinancing high-interest loans. The Bank of Korea will freeze the rate on its bank intermediated lending support facility despite the policy rate increase and will revamp the program next year to expand support for regional small and mid-sized companies. It will also broaden eligibility for a refinancing program that converts small business owners' loans carrying rates of 7% or higher into 4.5% loans. Funding for the Sunshine Loan program will rise to 6.2 trillion won ($4.6 billion) next year from 5.9 trillion won ($4.4 billion) this year, and the lending cap on Smile Microcredit loans for young adults will double to 10 million won ($7,400) from 5 million won ($3,700).
"People's livelihoods are the core of our economy," said Koo Yun-cheol, deputy prime minister and minister of finance and economy. "We will make every effort to stabilize livelihoods so that the warmth of growth and a domestic demand recovery reaches regional economies and the daily lives of the public, and we will provide thick protection for vulnerable groups including young adults, low- and middle-income households, small business owners and small and mid-sized companies."
