Starting This Week, a Flood of Support Measures for Small Business Owners... Will They Ease the Burden of High Interest Rates?

[Asia Economy Reporter Song Hwajeong] As the government’s financial support measures for small business owners and self-employed individuals, which have been prepared over time, begin to be implemented one after another starting this week, it is expected to alleviate the burden accumulated on small business owners and the self-employed due to soaring interest rates to some extent.

According to the Financial Services Commission on the 26th, a low-interest refinancing program for the self-employed and small business owners will be officially launched from the 30th, and from today, the online refinancing guidance system within the Credit Guarantee Fund will be operated on a trial basis.

The target for this low-interest refinancing program for high-interest loans is normal borrowers who suffered damage from COVID-19 and are individual business owners or small corporate businesses. The program supports business loans with interest rates of 7% or higher at the time of refinancing application. The refinancing limit is 50 million KRW for individual business owners and 100 million KRW for small corporate businesses, and multiple high-interest loans can be refinanced within the limit. The interest rate and guarantee fee for self-employed and small business owners using the refinancing program are capped at 6.5%, with the actual applied rate varying depending on the borrower’s credit rating.

For the first and second years, the interest rate is up to 5.5%, applying a fixed interest rate for two years based on the initial loan interest rate, and for the third to fifth years, the agreed interest rate (bank bond AAA 1-year + 2.0 percentage points) is applied as the interest rate ceiling. The guarantee fee is fixed at 1% per annum. Prepayment penalties for existing loans refinanced through this program and new loans taken out to repay existing loans are fully waived. The repayment structure is five years in total, with a two-year grace period followed by three years of installment repayments, and a total of 8.5 trillion KRW will be supplied by the end of next year. Applications will be accepted from the 30th via mobile apps and bank counters of 14 banks including Kookmin, Shinhan, Woori, Hana, IBK, NongHyup, Suhyup, Busan, Daegu, Gwangju, Gyeongnam, Jeonbuk, Jeju, and Toss. Detailed information for refinancing applications can be obtained through the online refinancing guidance system operating from today, and eligibility for the refinancing program can be confirmed.

The debt adjustment program for the self-employed and small business owners, Saechulbal Fund, which will officially launch on the 4th of next month, will begin accepting pre-applications through an online platform from the 27th. The Saechulbal Fund targets individual business owners or small business owners affected by COVID-19, allowing borrowers who are delinquent (overdue for 3 months or more) or at risk of delinquency (overdue less than 3 months) to apply for debt adjustment through the fund. All loans held by financial institutions participating in the 'Saechulbal Fund Agreement' (regardless of business or household collateral, guarantee, or credit) are eligible. For delinquent borrowers, principal adjustment applies to guarantee and credit debts, while interest rates and repayment periods are adjusted for collateral, guarantee, and credit debts of borrowers at risk of delinquency and collateral debts of delinquent borrowers. Delinquent borrowers undergo a strict screening process and receive a reduction rate of 60-80% on debt amounts exceeding their assets. The adjustment limit is 1 billion KRW for collateralized loans and 500 million KRW for unsecured loans, totaling 1.5 billion KRW. Applications can be submitted only once during the application period.

The financial authorities are also expected to announce this week the extension plan for the maturity extension and repayment deferral for small business owners expiring this month. The repayment deferral will be extended by one year, and the maturity extension will be operated in conjunction with the Saechulbal Fund, potentially extending up to three years.

With the financial support measures for the self-employed and small business owners being implemented one after another, it is expected that the breathing room for self-employed and small business owners suffering from high interest rates will somewhat improve. Due to the continued base interest rate hikes this year, the loan interest rates for individual business owners have sharply increased. According to data on 'Loan Balance by Interest Rate' submitted by the Financial Supervisory Service to Jin Sunmi, a member of the National Assembly’s Planning and Finance Committee from the Democratic Party, the proportion of loan balances with interest rates in the 2% range, which was 46.8% at the end of last year, decreased to 18.7% by the end of June this year, while loan balances with 3% interest rates increased from 39.9% to 55.7%, and those with 4% interest rates rose from 3.9% to 17.6%.