[Asia Economy Reporter Eunju Lee] It has been identified that loans to small-scale self-employed individuals are rapidly becoming delinquent. Since last year, the default rate of the Credit Guarantee Fund’s guarantee program for small merchants has steadily increased. There are opinions that it is necessary to prepare linkage measures with the New Start Fund for the Credit Guarantee Fund’s risk management.
According to the National Assembly Budget Office’s “2021 Fiscal Year Settlement Report” on the 22nd, the default rate of the Credit Guarantee Fund’s Small Merchant Entrusted Guarantee Program has steadily expanded. The default rate of the Small Merchant Entrusted Guarantee Program, which the Credit Guarantee Fund launched in May 2020, was 0.2% in 2020, the first year of implementation, and continuously rose each quarter to reach 2.2% as of the end of March 2022. (2020 0.2% → March 2021 1.0% → June 2021 1.3% → September 2021 1.5% → December 2021 1.7% → March 2022 2.2%).
The Credit Guarantee Fund is an institution that provides guarantees so that companies with weak collateral or credit can borrow money from financial institutions. The Small Merchant Entrusted Guarantee is a program that guarantees loans from financial institutions ranging from 20 million to 40 million KRW for small-scale merchants. It is one of the small merchant financial support programs implemented in 2020 due to COVID-19. The guarantee ratio of the Credit Guarantee Fund reaches 95%, and the program operates with a 5-year term consisting of a 2-year grace period and 3 years of installment repayment.
What is noteworthy is that defaults occurred immediately from the first year the program started. Considering that the grace period of the Small Merchant Entrusted Guarantee Program is 2 years, this means that the number of small merchants who could not even pay interest in the year they took out the loan rapidly increased. Defaults are recorded when the debtor fails to pay interest or is unable to repay the principal.
In the case of the Credit Guarantee Fund’s other program, the “General Guarantee Program,” the default rate and subrogation payment rate (the rate of repayment on behalf of the debtor) decreased during the same period. According to the National Assembly Budget Office, the amount of defaulted guarantees decreased slightly from 1.334 trillion KRW in 2020 to 1.1604 trillion KRW in 2021, and the default rate fell slightly from 2.4% in 2020 to 2.2% in 2021. The General Guarantee Program is a program that guarantees loans up to 3 billion KRW for working capital and 10 billion KRW for facilities for general companies.
However, in the future, there is a growing concern that defaults will occur in both programs, and fund insolvency is expected to increase. In particular, as the government’s maturity extension and repayment deferral measures are set to end at the end of September, there is a high possibility of direct and indirect repercussions. In the case of the Small Merchant Entrusted Guarantee Program, the grace period, which was scheduled to end in May 2022, was extended once, so it is not directly affected by the end of the maturity extension measures in September. However, the Budget Office analyzed that “although the end of these measures does not have a direct impact, it may increase the principal and interest repayment burden relative to the income of small merchants, which could also affect loan repayments under the Small Merchant Entrusted Guarantee Program.”
Accordingly, the Budget Office suggested the necessity of preventing insolvency of the Credit Guarantee Fund in advance. The Budget Office stated, “There is a risk that guarantee defaults of the Credit Guarantee Fund will expand following the end of financial support measures, and subrogation payments may increase sharply. It is necessary to prepare risk management measures in advance.” It further explained, “In cases where rehabilitation is not possible, debt adjustment can be made when exercising the right of recourse, or linkage with debt adjustment programs such as the New Start Fund can be considered.”
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