[Loan? Switch!] ③ Policy Finance Refinancing Loan, Effectiveness Controversy... Self-Employed Under Pressure

[Asia Economy Reporter Bu Aeri] "I don't know who this policy was made for. The Credit Guarantee Fund refinancing feels like a pie in the sky rather than a hope."

On communities where self-employed business owners gather, posts criticizing government measures continue to be posted. Although the government introduced a program to reduce the interest burden on small business owners by converting high-interest loans into low-interest loans, criticism that it lacks effectiveness persists. As a result, the application rate remains low.

While private refinancing of personal loans is becoming active amid the rising interest rate period, the situation for government-supported refinancing loans is quite different. According to the Financial Services Commission and the Credit Guarantee Fund on the 27th, the number of applications for the low-interest refinancing program for self-employed and small business owners was 15,839 from September 30th to the 15th of this month. The amount applied for was 532.7 billion KRW, which is only 6.3% of the planned target amount of 8.5 trillion KRW. The amount of loans executed was 220.2 billion KRW, just 2.6% of the target.

The Credit Guarantee Fund’s low-interest refinancing loan converts high-interest business loans over 7% taken out by self-employed and small business owners affected by COVID-19 into low-interest loans of up to 50 million KRW (100 million KRW for corporations) at 6.5% (loan interest rate 5.5% + guarantee fee 1%) or less. This is part of efforts to help small business owners struggling with interest burdens from high-interest loans from secondary financial institutions.

The government believes that the low awareness of this program is a factor in the low application rate and has asked the Credit Guarantee Fund to strengthen promotion. However, financial sector insiders have different views. One financial sector official said, "In a world where people even find special offers at rural agricultural cooperatives, if the program were good, everyone would know about it and apply."

Although this policy finance program was designed to ease the interest burden on small business owners, complicated application requirements are cited as one reason for its poor popularity. Only business loans such as facility and operating funds are eligible for refinancing applications, while personal loans are excluded.

Regarding this, a Financial Services Commission official said, "Since the loan maturity extension and repayment deferral programs for self-employed and small business owners due to COVID-19 are operating simultaneously, some borrowers still have room to repay their debts, and some borrowers in critical situations due to high interest rates are turning to the New Start Fund. We are currently reviewing whether there are institutional improvements possible to expand the refinancing loan targets, as it is difficult to clearly distinguish between business loans and personal loans."

From the banks’ perspective, there is no incentive to actively participate. With credit loan interest rates for high-credit borrowers approaching 7%, there is no reason to take on the risk of refinancing secondary financial institution business loans that may become non-performing. A commercial bank official said, "Many individual business owners have loans from secondary financial institutions and are often multiple debtors. Multiple debtors tend to have low credit ratings and poor debt repayment ability, so it is difficult for them to even pass the cut-off line."

The situation is similar for another policy finance product, the Safe Conversion Loan. The Safe Conversion Loan converts variable-rate mortgage loans into fixed-rate loans. According to the Korea Housing Finance Corporation, as of the 23rd, the cumulative application amount was 8.8355 trillion KRW, which is 35.3% of this year’s supply target of 25 trillion KRW. After poor performance, the Housing Finance Corporation relaxed the eligibility criteria last month from houses priced below 400 million KRW and combined spousal income below 70 million KRW to houses priced below 600 million KRW and combined spousal income below 100 million KRW, but results remain sluggish.

Experts advised that introducing incentive systems could be another method. Professor Seo Jiyong of the Department of Business Administration at Sangmyung University said, "It is necessary to relax application conditions, but it is also worth considering giving regulatory relief or incentives to commercial banks actively participating in policy finance."