▲ A bank loan counter in Seoul during the COVID-19 pandemic in 2021
The government will write off and restructure overdue debts lasting more than three years for small business owners hit hard by the pandemic who face the risk of taking a direct hit amid the full-fledged interest rate hike cycle, supporting their return to society.
Additional incentives such as rate cuts, higher credit limits, and interest reductions will be provided to small business owners who faithfully repay their debts despite difficult circumstances.
The government held the Emergency Economic Headquarters Meeting, Economic Ministers' Meeting, and the Task Force Meeting of Ministers related to Special Management of People's Livelihood Prices chaired by Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol today (the 28th) to discuss the "Support Measures for Vulnerable Borrowers in Preparation for the Interest Rate Hike Cycle" containing these details.
The government will push for debt restructuring next year for self-employed individuals and small business owners who have yet to repay financial support received during the COVID-19 period.
This comes after the Bank of Korea's Monetary Policy Board raised the benchmark interest rate again to 3.00% yesterday, following last month's hike, to preemptively respond to rising inflation.
With the possibility of additional hikes left open for the future, concerns are mounting over the increased repayment burden on borrowers.
The targets for debt restructuring are long-term overdue debts among unsecured claims held by financial sectors and public institutions against pandemic-hit small business owners, where overdue payments began before June 2023 and have continued until now.
During the pandemic period from 2020 to 2023, a total of 388.7 trillion won in sole proprietor loans was executed. The unpaid balance stands at 154.7 trillion won, or 43.1% of the total, while the ratio of overdue loans exceeding three months accounts for 4.1%, or 6.3 trillion won.
Major overseas economies injected government funds during the crisis response, whereas South Korea supported the self-employed mainly through the financial sector. This has led to the judgment that there is a clear justification for support given the heavy repayment burden.
The government explained the background, stating, "This is to provide a special opportunity for our social community to give a chance to bounce back so that self-employed individuals, who sacrificed their livelihoods for our social community during the COVID-19 period, can overcome their long-term debt burdens."
The specific measures are scheduled to be announced within the fourth quarter of this year.
Kang Ki-hong, Assistant Minister for Policy Coordination at the Ministry of Economy and Finance, explained in a preliminary briefing the previous day that "the targets, scale, and level of write-offs and restructuring must be determined before next year's budget bill is finalized."
The government will also strengthen debt management by financial public institutions in the second half of this year, such as the wholesale write-off of long-term overdue debts lasting 20 years or more.
The Export-Import Bank of Korea will carry out its first wholesale write-off of long-term unpaid special bonds targeting small and medium-sized enterprises (16.2 billion won this year) and simultaneously eliminate debts for joint guarantors such as chief executive officers.
The government will extend the Corporate Restructuring Promotion Act, which is set to sunset at the end of this year, to support the smooth recovery of corporations.
It will also expand cooperation agreements for local government interest subsidy support for corporate rehabilitation, expand support for personal rehabilitation litigation costs and lawyers, and provide consulting for small businesses.
The government will expand incentives for small and medium-sized enterprises and small business owners who have faithfully repaid their debts despite difficult conditions.
Examples include a 0.3 percentage point preferential interest rate and a 200 million won increase in the borrowing limit from the Korea Small Enterprise and Market Service, as well as a twofold expansion in the supply of Industrial Bank of Korea's hope-dream loans for small businesses.
It plans to expand preferential guarantee fee rates for promising small business owners and grant interest reductions to companies undergoing restructuring if they faithfully service their debt without arrears.
The utilization of faithful repayment information will also be promoted when reorganizing the regional credit guarantee evaluation system next year.
The Bank of Korea will reorganize its financial intermediary support loan system next year.
This system operates by pre-determining the total limit of loans supplied by the Bank of Korea to banks and allocating limits according to certain criteria. It aims to expand support for regional small and medium-sized enterprises.
The Korea SMEs and Startups Agency will also push to expand the supply scale of interest subsidies for small and medium-sized enterprise policy funds next year.
The Small Enterprise and Market Service will push to establish new interest subsidy programs to streamline support for small businesses.
The Export-Import Bank of Korea will launch rapid special loans (50 billion won) and technology special loans (100 billion won) next month.
It is pursuing a plan for the Export-Import Bank to pay guarantee fees for the Korea Credit Guarantee Fund and Korea Technology Finance Corporation on their behalf.
The Korea Development Bank will increase its relief interest rate conversion support fund limit by 500 billion won to 1.5 trillion won next year to mitigate interest rate fluctuation risks.
The Korea Technology Finance Corporation will also establish a new guarantee fee reduction system for corporate management improvement guarantees.
The expansion of microfinance products for medium-to-low credit holders will also be pushed.
The annual supply scale of Sunshine Loan, a policy microfinance product, is expected to reach 6.2 trillion won next year, an increase of 300 billion won compared to this year.
The loan limit for the Youth Smile Microcredit will be raised from 5 million won to 10 million won, and its eligible user range will be broadened.
The government is reviewing the expansion of the supply of Bogeumjari Loans, which feature fixed interest rates.
By introducing a credit evaluation model specialized for small business owners, those falling into higher tiers will have their credit ratings upgraded and receive preferential rates and limits.
To expand microfinance programs by financial companies and corporations, incentives in household debt aggregate management will be given to mid-rate loans.
Addressing concerns that the costs of supporting vulnerable borrowers by private financial companies could be passed on to high-credit holders, Assistant Minister Kang said, "The business conditions of financial companies are decent, and the level is manageable for them to shoulder a portion for social contribution," adding, "Financial authorities will manage the situation so that side effects do not expand to other sectors."
(Photo: Yonhap News)
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