[Zombie Company Warning] Seeds That Grow Insolvency, The Paradox of Supporting Limit Companies

Experts Agree "Restructuring of Zombie Companies Needed"
Removing Financial Forbearance Reveals True Soundness
Banks Must Manage Risks More Sensitively for Now

[Asia Economy Reporters Hyojin Kim and Seungseop Song] "'Life-sustaining treatment' vicious cycle is a large-scale 'seed of insolvency.' We must prepare for the post-grace period situation by weeding out marginal companies."

Experts, concerned about the rapid increase of 'marginal companies' that cannot even properly repay interest, let alone the principal of loans, unanimously emphasized the 'need for restructuring.' Extraordinary measures such as interest rate cuts, loan principal repayment, and interest payment deferral, which serve as a kind of life-sustaining treatment to overcome the unprecedented crisis, could lead to the worst-case scenario where both banks and companies become endangered the moment the protective shield is removed.

Accordingly, there are calls to promptly prepare proactive soft-landing measures assuming the 'post-COVID-19 financial support' period and to guide companies surviving on debt to develop at least minimal self-sustainability, while urgently reviewing the current overall support policies.

Professor Soyoung Kim of Seoul National University’s Department of Economics stated on the 25th, "The problem lies with companies whose management conditions do not recover even after the COVID-19 situation ends. If the deterioration was due to COVID-19, then more time and support may be necessary, but if not, the market should naturally sort them out or allow them to survive on their own."

Professor Sangbong Kim of Hansung University’s Department of Economics emphasized, "The government’s continuous deferral of principal and interest repayments is causing problems to accumulate and expand. Along with support, urgent efforts are needed to actively identify and weed out marginal companies."

"The 'optical illusion' disappears... Banks must continue to pay close attention to risks for the time being"

The central bank also warned about the risks of marginal companies. The Bank of Korea analyzed the reality that 'vulnerable companies' with weak interest repayment ability account for nearly 40% of all analyzed companies as "an increase in the proportion of vulnerable companies due to deteriorating corporate profitability despite reduced borrowing costs under the financial easing policy." The government and financial authorities’ policies have lowered the threshold for banks and made borrowing easier, but management conditions have not improved, meaning many companies cannot handle their loans. The Bank of Korea expressed concern, stating, "Financial support for companies has a positive aspect of supporting temporarily insolvent companies, but if prolonged, it may delay corporate restructuring."

There are also voices urging banks that lent money to vulnerable companies to manage soundness more sensitively. This is because the 'optical illusion' caused by policy support and temporary regulatory relaxation will inevitably disappear soon.

Professor Taeyoon Sung of Yonsei University’s Department of Economics advised, "At some point, the deferral must end, but sudden adjustment would cause significant damage, so a phased approach with a set order should be devised." The Hana Financial Management Research Institute forecasted in its '2021 Financial Industry Outlook' report that "the proportion of marginal companies will exceed 20% due to COVID-19 impact," and stated that prompt responses such as proactive provisioning are required of banks.

According to financial authorities, from February last year to April this year, about 40.2 trillion KRW in loans and guarantees were supported. Approximately 20.1 trillion KRW was also injected to stabilize the short-term funding market, including corporate bond underwriting. Additionally, loan maturities amounting to about 165.8 trillion KRW, mainly for small and medium-sized enterprises, were extended. The loan maturity extension measures will continue until September.