[Financial Services Commission Report] "Extension of Maturity and Further Extensions Unavoidable"... Growing Concerns Over Accumulated Potential Non-Performing Loans (Comprehensive)

"Is It Right to Demand 'Full Repayment' from Struggling Borrowers?"
"Consider COVID-19 Quarantine Situation and Real Economy Trends"
Banking Sector Concerns over Risk Increase Due to Accumulated Potential Defaults
"True Soft Landing Needed through Normalization of Interest Repayments"

Eun Sung-soo, Chairman of the Financial Services Commission

[Asia Economy Reporter Kim Hyo-jin] Eun Sung-soo, Chairman of the Financial Services Commission, expressed the view that it is inevitable to extend once again the loan maturity extension and interest repayment deferral measures for small business owners and small and medium-sized enterprises (SMEs) affected by the novel coronavirus infection (COVID-19).

According to financial authorities on the 19th, Chairman Eun stated during the 2021 business plan briefing held online the previous day, "We need to comprehensively consider the current (COVID-19) quarantine situation, real economy trends, and the financial sector's capacity to endure," and made these remarks.

The financial authorities initially extended the loan maturity extension and interest repayment deferral measures for small business owners affected by COVID-19, which were originally until September last year, once more until March. The financial authorities are discussing with the financial sector the possibility of extending these measures once again.

He said, "Last week, the government provided 1 million won or 3 million won to struggling small business owners, and I understand that almost all of it was claimed on the first and second days," adding, "This shows how much small business owners are generally in difficulty, so I wonder if it is right to tell them to pay off all their debts."

In the banking sector, while there is general agreement on the necessity of an additional extension of loan maturities, there is reluctance to further defer interest repayments. The reason is that if interest repayments are not made, it becomes difficult to assess the soundness of loans, which could lead to significant risks in the future, so a proactive and appropriate selection process is necessary.

Regarding this criticism, Chairman Eun explained, "(Not all of the support target small business owners, etc.) are not paying interest," and "Out of the total 400,000 cases including maturity extensions, only 13,000 cases are not paying interest, and the rest have all paid. This is a very surprising fact."

He added, "Some say that deferring interest repayments would prevent proper selection, but in reality, many borrowers are paying interest," and "I understand that banks are monitoring the companies they deal with (through payment of public charges, etc.)."

Chairman Eun said, "Considering the soundness and profitability of the financial sector, the (deferral) measures are in a situation that can be sufficiently endured," and "We will consult well with the financial sector going forward." He also added, "We are also considering ways to ensure a soft landing so that borrowers are not burdened even after the measures end."

The banking sector is concerned that such measures could ultimately impose a heavy burden on both the financial sector and borrowers. In particular, the rapidly rising loan receivables growth rate in the financial industry is cited as an important variable.

According to the Korea Institute of Finance, the loan receivables growth rate of commercial banks at the end of last year is estimated to be 10%. This is nearly double compared to the 5-6% range maintained from 2017 to 2019.

A senior official from a commercial bank said, "It is not desirable to decide whether to extend the measures based solely on the scale of interest repayment deferrals," pointing out, "Both financial companies and the borrowers must bear much greater tangible and intangible costs than expected to manage an individual's debt default."

Another commercial bank official expressed concern, saying, "While normalizing interest repayments in principle, a genuine soft landing plan is needed that allows the financial company to seek appropriate countermeasures with the borrower so that the borrower is not immediately pushed into a crisis," and "If the deferral measures are ended all at once at the time they should be terminated, a physical soft landing may become impossible."