Unpaid pandemic-era loans total 154.7 trillion won

Authorities weigh bond purchases, cancellations and principal reductions

Perks expanded for small businesses that repay on time

A loan counseling session for small business owners in financial distress at the Seoul West Center of the Small Enterprise and Market Service during the height of the pandemic in 2020. [Newsis]
A loan counseling session for small business owners in financial distress at the Seoul West Center of the Small Enterprise and Market Service during the height of the pandemic in 2020. [Newsis]

The government will write off and restructure debts that COVID-hit small business owners have left unpaid for more than three years, while expanding incentives — including lower interest rates, higher credit limits and interest reductions — for those who repay diligently. The measures aim to prevent a further buildup of debt among self-employed workers and small business owners as sluggish domestic demand since the pandemic has been compounded by rising interest rates.

The government announced the support package Friday at an emergency economic headquarters meeting chaired by Deputy Prime Minister and Finance Minister Koo Yun-cheol. The plan, titled "Support Measures for Vulnerable Borrowers Ahead of a Rising Interest Rate Environment," was drawn up after the Bank of Korea raised its benchmark interest rate to 3.0 percent on Thursday, a move expected to deepen the debt burden on financially vulnerable borrowers.

The debt restructuring will target long-overdue unsecured loans held by financial institutions and public institutions against small business owners affected by COVID-19 — specifically those that fell into arrears before June 2023 and have remained delinquent since.

A total of 358.7 trillion won ($260 billion) in loans to sole proprietors was extended during the pandemic years of 2020 to 2023. Of that, 154.7 trillion won, or 43.1 percent, remains unpaid, and 6.3 trillion won — 4.1 percent of the outstanding balance — has been overdue for three months or more.

The government said it will announce specific measures within the fourth quarter of this year.

The government will also tighten management of loans held by state-run financial institutions in the second half of this year, including a blanket write-off of debts overdue for 20 years or more.

The Export-Import Bank of Korea will lead the effort by writing off long-outstanding special loans to small and medium-sized enterprises in bulk — 16.2 billion won worth this year — and will simultaneously cancel the obligations of joint guarantors, including chief executives.

The government will also extend the Corporate Restructuring Promotion Act, which is set to expire at the end of this year, to help businesses get back on their feet. Additional measures include expanding local government interest-subsidy agreements for corporate rehabilitation, broadening legal cost and attorney support for personal bankruptcy proceedings, and providing consulting services for small business owners.

Benefits for borrowers who repay faithfully will be expanded at the same time. Examples include a 0.3 percentage point preferential interest rate and a 200 million won credit limit increase through the Small Enterprise and Market Service, as well as a doubling of the supply of the Industrial Bank of Korea's Hope Dream loans for small businesses. The government also plans to extend special guarantee fee discounts to small businesses with strong growth potential, and to reduce interest charges for companies undergoing restructuring that continue to service their debts without falling into arrears. The use of on-time repayment records in regional credit guarantee screening will also be pursued when the system is overhauled next year.

The government will also move to ease interest rate burdens through policy finance. The Bank of Korea plans to reform its financial intermediary lending support program next year to expand assistance for small and medium-sized enterprises in regional areas. The Korea SMEs and Startups Agency will also seek to increase the scale of its interest subsidy supply for SME policy funds next year. The Small Enterprise and Market Service is reviewing the creation of a new interest subsidy program to lower the interest burden on small business owners.

The Export-Import Bank of Korea will launch 50 billion won in fast-track special loans and 100 billion won in technology special loans next month, and will also pursue a plan to pay guarantee fees on behalf of borrowers to the Korea Credit Guarantee Fund and the Korea Technology Finance Corp. Korea Development Bank will expand its fixed-rate conversion support fund — designed to reduce exposure to rising interest rates — to 1.5 trillion won next year, an increase of 500 billion won from this year. The Korea Technology Finance Corp. will also introduce a new guarantee fee reduction program for its corporate management improvement guarantees.

Support for low- and middle-credit borrowers will be broadened to improve their access to finance. The government is pursuing a plan to expand the annual supply of Haetsal-lon, a policy microfinance product, by 300 billion won to 6.2 trillion won next year. The loan ceiling for youth microfinance will be doubled from 5 million won to 10 million won, and eligibility will be widened.

Measures to reduce exposure to interest rate fluctuations through fixed-rate products are also in the works. The government is reviewing an expansion of Bogeumjari-lon, a fixed-rate policy mortgage, and will pursue a plan to introduce a credit-scoring model tailored to small business owners that would raise credit ratings and offer preferential interest rates and credit limits to those in the top tiers. To encourage financial companies and businesses to expand their microfinance programs, the government will grant incentives under household debt management rules for mid-rate loans.


oskymoon@heraldcorp.com