Extended Loan Maturity and Payment Deferral... Now They Want to Touch My Credit Rating?

"Minimizing Loan Condition Disadvantages Even If Credit Rating Drops"

[Asia Economy Reporter Park Sun-mi] Financial authorities' pressure to protect small and medium-sized enterprises (SMEs) and small business owners affected by COVID-19 from credit rating downgrades and to minimize disadvantages such as loan conditions even if ratings fall is causing deep concerns in the financial sector about having to revise credit evaluation models.

According to financial authorities on the 7th, banks, insurance companies, and policy financial institutions must fully reflect the recovery potential when evaluating the credit ratings of SMEs and small business owners starting from the 1st of next month. It will also be mandatory to establish and apply standards that minimize loan condition disadvantages if there is no delinquency or capital erosion, even if the credit rating falls. This measure was prepared with the intention of preventing SMEs and small business owners, whose operations temporarily worsened due to COVID-19, from bearing excessive burdens such as credit rating downgrades.

The financial sector complains that extending the COVID-19 loan maturity extension and repayment deferral measures until September, combined with easing credit ratings and related loan conditions, will force the financial sector to bear the burden of private sector insolvencies. There is criticism that populist policies aimed at currying favor are becoming increasingly serious.

An official from Bank A said, "The directive to fully reflect recovery potential in non-financial evaluations or the final credit rating calculation process essentially means that banks must bear the risk of insolvency," adding, "Since it requires changes to the existing credit evaluation application methods, preparing the standard guidelines itself is a considerable burden."

There is also a view that financial authorities' interference in banks' credit rating evaluations is uncomfortable.

An official from Bank B pleaded, "This measure by financial authorities is like asking to prevent credit rating downgrades for SMEs and small business owners by considering temporary factors arising from the special situation of COVID-19." He continued, "Although it is stated to fully reflect the recovery potential of small business owners in the non-financial evaluation section, unlike financial evaluations that include objective financial figures such as sales and debt ratios, non-financial evaluations involve many non-quantitative aspects such as industry and management risks and reliability, so it is no different from being told to manipulate credit evaluations."

Concerns about Side Effects of Deferred Insolvency

There are also voices expressing concerns about side effects arising from differences in credit evaluation models among financial institutions and the varying levels and types of information about borrowers, which may lead to discrepancies in detailed application standards by bank.

An official from Bank C pointed out, "There could be a rubber-band standard applied to SME and small business owner credit evaluations depending on the bank," adding, "From the bank's perspective, the part that can indicate the possibility of borrower insolvency is whether interest is being paid normally, but the extension of COVID-19 loan maturity and repayment deferral measures makes even this evaluation less objective." He warned that providing excuses to rescue those with downgraded credit ratings could only defer insolvency, causing side effects.

Financial authorities have dismissed concerns that these measures to support small business owners and SMEs could impose excessive burdens on financial institutions.

They argue that reflecting recovery potential in credit evaluations reasonably considers temporary business deterioration caused by the special situation of COVID-19, which could rather lead to a more accurate assessment of the borrower's repayment ability and thus may not result in a burden on financial institutions. A Financial Services Commission official said, "Minimizing loan condition deterioration through adjustments such as additional interest rates for borrowers whose credit ratings have fallen but who are not insolvent enables continuous business operations and ongoing transactions with financial institutions," adding, "It will not act as an excessive burden on financial institutions."

A financial sector official emphasized, "The authorities' explanation assumes a scenario where no insolvency occurs for the borrower," and added, "For banks, managing risk to prevent insolvency is more important than loan execution."