[1mm Financial Talk] March Small Business Loan Extensions, The Complicated Reality Behind the Scenes

As Loan Maturity Extensions Lengthen, Potential Non-Performing Loans Grow
Burden on Both Financial and Banking Sectors...

COVID Cases Surge Just Before 2nd and 3rd Extensions End
Repeated Extensions Followed Amid the Wave
Omicron Spread in March Key to Ending 4th Extension

Presidential Candidates Promise "Flood of Support Funds for Self-Employed"
Concerns Over Policy Conflicts if Extensions End Under New Government

[Asia Economy Reporter Sim Nayoung] On April 1, 2020, during the Daegu Shincheonji COVID-19 crisis when city streets across the country were eerily empty, domestic banks first began extending loan principal maturities and postponing principal and interest repayments for small business owners. The Financial Services Commission (FSC) implemented this system through agreements with financial institutions. At the time, even the FSC probably did not anticipate that this loan maturity extension program, created without any legal basis, would cling to a lifeline for nearly two years.

As a senior government official said, "Although COVID-19 spread worldwide, no country instructed all financial sectors to grant debt relief." This was a measure unseen even during the 1997 foreign exchange crisis and the 2008 financial crisis. Conversely, this also implies that the FSC and banks found the policy burdensome. The longer the loan extension period stretches like taffy, the more potential non-performing loans accumulate proportionally.

The FSC reluctantly announced extensions three times so far (1st: September 2020?March 2021, 2nd: March?September 2021, 3rd: September 2021?March 2022). The first extension was a government decision in response to small business difficulties caused by strengthened social distancing. During the second extension, the FSC considered ending the program, but the surge in COVID-19 cases prevented it. Until mid-September 2020, new cases were in the hundreds, but by December they rose to the thousands, and the hundreds-level trend continued until March the following year.

In September of that year, just before the third extension ended, the situation was similar. From July, confirmed cases exceeded 1,000, reaching 2,000 in August, and on September 25, just before the maturity ended, cases surpassed 3,000. At that time, unprecedented quarantine measures limited private gatherings to four people before 6 p.m. and two people afterward. Nationwide protests by small business owners condemning the government’s extension of social distancing took place. Swept up in this atmosphere, the FSC had no choice but to decide on the third extension.

Moreover, with about a month left before the end of March, the Omicron variant is spreading like wildfire. An FSC official said, "The key is the spread of Omicron as the March maturity extension end approaches." This time, the maturity extension is unlikely to end easily. Israel, a leading country in booster shots, is experiencing a surge in severe COVID-19 cases, and predictions that domestic cases will exceed 100,000 in March are the biggest concern for the FSC and banks.

Presidential candidates’ pledges are also variables. "We must prepare an additional supplementary budget of 25 to 30 trillion won to support small business owners with the determination of 'saving Private Ryan'" (Lee Jae-myung, Democratic Party candidate), "We will invest 50 trillion won during the first 100 days of the new government to compensate self-employed people affected by government business restrictions" (Yoon Seok-youl, People Power Party candidate).

Regardless of who wins, the promise to provide support funds to small business owners will be discussed immediately by the transition committee after the election on the 9th of next month. Ending the maturity extension could give the impression of going against the new government’s policy direction. A senior official at a commercial bank said, "Financial institutions are already viewed unfavorably by the political sphere, so figuring out how to navigate this is a major concern for banks these days."

Experts fundamentally believe that the correct approach is ‘end maturity first, then facilitate smooth repayment.’ Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University and former president of the Korean Economic Association, said, "Although it is the COVID-19 situation, loans without scrutiny are the most concerning issue for the country," and "It is urgent to closely examine companies that could not even pay interest and have them repay to understand the actual situation." However, from a practical standpoint, voices are emerging that extensions may still be necessary.