The default rate at the Korea Credit Guarantee Fund, which collects guarantee fees and repays banks on behalf of borrowers who fall behind on loans, is projected to exceed 4% this year. The increase follows a sharp expansion in guarantee supply during the COVID-19 pandemic, compounded by weak domestic demand and rising interest rates.
According to the office of Rep. Suh Il-joon of the People Power Party, a member of the National Assembly's National Policy Committee, the fund projected in its 2026-2030 medium-term financial management plan that its general guarantee default rate would reach 4.3% this year, up 0.6 percentage point from a year earlier. The fund classifies a guarantee as in default once a borrower is one month behind on payments. If the loan is not brought back to normal status after about three more months, the fund makes a subrogated payment to the bank on the borrower's behalf.
General guarantees are the fund's core business, helping small and medium-sized enterprises and venture firms with limited credit obtain bank loans. The default rate has been trending higher as guarantee volumes expanded in response to a series of economic shocks, including the pandemic and U.S. tariffs. The general guarantee default rate stood at about 2.0% in 2021, rose to 3.3% in 2023 and 3.7% in 2025, and is expected to top 4% this year. It would be the first time the fund's general guarantee default rate has exceeded 4% since 2015, when it stood at 4.0%.
Analysts say the repayment capacity of smaller companies is also weakening as interest rates climb and domestic demand remains sluggish. This year, surging oil and raw material prices tied to the war in the Middle East have added to cost burdens, further hampering debt repayment. "We believe the high interest rate and high exchange rate environment seen this year is affecting the default rate," an official at the fund said.
The rising default rate translates into larger subrogated payments. The fund's subrogated payments on general guarantees totaled 1.1509 trillion won in 2022 but more than doubled to 2.4362 trillion won last year. The subrogated payment ratio also doubled over the same period, to 3.8% from 1.9%. "As defaults materialize on guarantees extended during the COVID-19 period, provisions are expected to increase by 233.9 billion won through 2028," an official at the fund said. "We expect gradual stabilization from 2029 through default management."
The fund may also scale back its general guarantee supply to manage its financial indicators. In its 2026-2030 medium-term financial management plan, the fund set its 2030 credit guarantee support target at 73.9114 trillion won, down 4.0661 trillion won from this year's plan of 77.9775 trillion won. Industry officials say, however, that cutting supply is difficult in practice, meaning the default problem could persist for a considerable period.
The fund has set a goal of holding this year's general guarantee default rate at around 3.9% by stepping up risk management through the end of the year. "Despite the risk of rising defaults from U.S. tariff measures and the war in the Middle East, we will manage this year's target default rate within 90% of the projection of 4.3%," an official at the fund said. "Through wide-ranging efforts to minimize the increase in defaults from growing internal and external uncertainty, we have set the 2027 target default rate at 3.8%."
The problem is that the operating environment for smaller companies remains challenging for the rest of the year. With the domestic demand recovery slow, the Bank of Korea raised its policy rate for a second consecutive month starting in July, lifting the base rate to 3.0%. Major economies including the U.S. and Japan may also raise rates, which would push domestic rates even higher. The fund's current default rate projection does not reflect the impact of the Bank of Korea's two rate increases.
"A rising default rate at the fund could lead to a funding crunch for small businesses and venture firms," Suh said. "Soundness management must be strengthened to prepare for economic uncertainty amid the upward trend in interest rates."
