SMEs Enduring COVID-19 with Debt... Bank of Korea Provides Additional Support

Bank of Korea Increases Gold Collateral Limit from 30 Trillion to 35 Trillion Won

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] As the number of small and medium-sized enterprises (SMEs) and self-employed individuals struggling with debt due to the COVID-19 crisis rapidly increases, the Bank of Korea has decided to inject an additional 5 trillion won. Following the initial 5 trillion won injection in early February during the onset of the COVID-19 outbreak, the total support for SME loans through commercial banks will now reach 10 trillion won.

On the 13th, the Bank of Korea's Monetary Policy Committee announced that at the meeting on the 14th, it plans to increase the limit of the Financial Intermediation Support Loan (hereafter, FISL) by 5 trillion won due to COVID-19. Accordingly, the FISL limit will rise from 30 trillion won to 35 trillion won. The FISL is a system where commercial banks first provide loans to SMEs and individual business owners, and later the Bank of Korea supports about half of the loan amount at a low interest rate.

The Bank of Korea had already raised the FISL limit from 25 trillion won to 30 trillion won on February 27. As of the end of last month, approximately 81% of this amount had been utilized. Initially, there were concerns in the market that even if the Bank of Korea lent money cheaply, the high barriers at banks would limit effectiveness. However, the limit was nearly exhausted in just over two months since implementation.

Of the newly supplied 5 trillion won, 1 trillion won will be allocated to the Seoul area, and the remaining 4 trillion won to other regions. The support targets SMEs (including individual business owners) affected by the spread of COVID-19, providing working capital loans with maturities within one year. The support period extends until the end of September. While the Bank of Korea generally supports 50% of the loan amount, the support ratio will be increased to 75-100% for loans to individual business owners and low-credit companies. The loan interest rate applied when commercial banks procure funds from the Bank of Korea is 0.25% per annum. The Bank of Korea lowered the FISL interest rate in March.

However, the loan limit per company is set at 500 million won, which is half of the 1 billion won limit during the first support phase. Choi Jae-hyo, head of the Bank of Korea's Financial Planning Team, stated, "The limit was lowered to allow more affected companies to receive support evenly." He added, "We expect this measure to improve financial accessibility and funding conditions for companies (including individual business owners) struggling due to COVID-19."

Meanwhile, due to the impact of the FISL, bank loans to COVID-19 affected companies have increased significantly recently. Bank loans to affected companies rose by about 6 trillion won during March and April. The average loan interest rate for COVID-19 support funds (newly issued amount, based on the four major commercial banks) in March was 2.84%, which was 40 to 120 basis points (1bp = 0.01 percentage points) lower than other SME loan rates.