Second Round Small Business Loans See Sharp Decline in Popularity but Remain a Lifeline for Low-Credit Borrowers

31,400 Pre-registrations in 5 Days

[Asia Economy Reporter Kim Hyo-jin] The popularity of the second emergency loan (2nd loan) from commercial banks to support small business owners affected by the novel coronavirus infection (COVID-19) is waning. This is attributed to relatively higher interest rates and lower loan limits compared to the first financial support program implemented earlier.

However, banks view the demand as higher than initially expected. It is assessed that there are still many small business owners with medium to low credit ratings who are in urgent need of funds.

According to the Financial Services Commission on the 26th, during the five days from the 18th to the 22nd when pre-applications for the 2nd loan for small business owners began, a total of 31,442 applications (314.4 billion KRW) were received by seven banks including KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK Industrial Bank, and Daegu Bank. Considering additional counts from some banks after the 22nd, it is estimated that at least 35,000 applications have been received as of this date.

Most applicants are said to have a credit rating of 4 or below, according to banks' general explanation. A representative from a commercial bank said, "Based on the current trend, about half of all applicants appear to be medium to low credit borrowers with a rating of 4 or below," adding, "It is estimated that there are particularly many low credit borrowers with a rating of 7 or below who find it difficult to enter the formal financial system."

The first loan was supplied with a fixed interest rate of 1.5% per annum up to a maximum of 30 million KRW. For the secondary interest subsidy loan through commercial banks, credit ratings were limited to 1 to 3. Medium credit borrowers with ratings 4 to 6 and low credit borrowers with ratings 7 or below were served through IBK Industrial Bank and the Small Enterprise and Market Service, respectively.

This time, the 2nd loan limit was lowered to 10 million KRW, and the interest rate increased to around 3-4% for medium credit borrowers. Another commercial bank official said, "There were predictions that applications would be very low due to the limit and interest rate, but it seems that applications are more than expected," adding, "This indicates that there are many small business owners who urgently need even a small amount of funds to get through day by day."

Compared to the first loan, the enthusiasm is definitely lower. The first loan, which began accepting applications on the 1st of last month, saw an explosive response with daily average applications exceeding 25,000 in the early days.

A financial authority official said, "The first loan was implemented amid the impact of high-intensity social distancing, so the background was very different from now," adding, "Although the 2nd loan is somewhat disadvantageous in terms of limits and interest rates, since the government guarantees 95% of the loan, the threshold is very low, and it is expected to provide some relief to medium and low credit small business owners over the longer term."

The full review process for the 2nd loan began the day before. Accordingly, it is expected that loans will be executed as early as the end of this month.

Meanwhile, the National Assembly Budget Office pointed out in its report titled 'Status of COVID-19 Response Policy Finance Support' published in the 'Economic and Industrial Trends & Issues' on the same day that emergency financial support programs for small business owners showed significant differences in execution performance depending on the product.

According to the report, the utilization rate of the Small Enterprise Management Stabilization Fund by the Small Enterprise and Market Service among the first loan programs was 97.6% as of the end of last month. At the same point in time, the loan utilization rate of IBK Industrial Bank was 80.2%, and the secondary interest subsidy loan from commercial banks was 38.3%. The Budget Office suggested, "Future policy finance support should check demand by referring to the utilization rates of each program."