The default rate at the Korea Credit Guarantee Fund, which guarantees loans for small and mid-sized companies, is projected to exceed 4% for the first time in a decade. The increase follows a sharp expansion in guarantees during the COVID-19 pandemic, compounded by weak domestic demand and rising interest rates.
According to the office of Rep. Seo Il-jun of the People Power Party, a member of the National Assembly's National Policy Committee, the fund projected in its 2026-2030 medium- to long-term financial management plan that the default rate on general guarantees would reach 4.3% this year, up 0.6 percentage points from a year earlier. The fund books a loan as impaired once a borrower falls one month behind on payments. If the loan is not brought back to normal after roughly three more months, the fund makes a subrogated payment, repaying the bank on the borrower's behalf. General guarantees are the fund's core business, helping small and mid-sized companies with limited credit obtain loans from financial institutions.
The fund's default rate has been climbing as guarantee volumes expanded in response to a series of shocks, including the pandemic and U.S. tariffs. The default rate on general guarantees 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 rate has exceeded 4% since 2015, when it was 4.0%.
With interest rates rising and the domestic slowdown dragging on, the repayment capacity of small and mid-sized companies is also weakening, according to the analysis. The war in the Middle East has driven up oil and raw material prices this year, adding to cost burdens and further hampering debt repayment. "We believe the high interest rates and won weakness seen this year are affecting the default rate," an official at the fund said.
The rising default rate translates into larger subrogated payments. Subrogated payments on general guarantees totaled 1.15 trillion won ($830 million) in 2022 but more than doubled to 2.44 trillion won ($1.76 billion) last year. The subrogated payment ratio also doubled over the same period, to 3.8% from 1.9%. "As losses on guarantees extended during the pandemic materialize, we expect provisions to increase by 233.9 billion won through 2028," a fund official said.
The fund may also scale back the volume of general guarantees to manage its financial burden. In the 2026-2030 plan, the fund said it would provide a total of 73.91 trillion won in credit guarantees in 2030, or 4.07 trillion won less than this year's plan of 77.98 trillion won. Industry officials said, however, that cutting supply in practice would not be easy, meaning the problem of soured guarantees could persist for some time.
The fund has set a target of holding the default rate on general guarantees at about 3.9% this year through stronger risk management. "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 at within 90% of the projection of 4.3%," a fund official said. "Through a range of efforts to minimize the increase in defaults stemming from greater uncertainty at home and abroad, we have set the target default rate for 2027 at 3.8%."
The difficulty is that the business environment for small and mid-sized companies remains challenging for the rest of the year. With the recovery in domestic demand slow, the Bank of Korea raised its policy rate for two consecutive months 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 higher still. The fund's current default rate projection does not reflect the impact of the central bank's two rate increases in July and August.
"A rising default rate at the fund could lead to a funding squeeze for small businesses and venture companies," Seo said. "Soundness management must be strengthened to prepare for economic uncertainty amid the upward trend in interest rates."
