Homeplus ARB Loan Repayment Issues Draw Public Attention
Measures to Prevent Default Risk from Shifting to Selling Companies
Settlement Cycle to Be Shortened from 90 to 60 Days, Recourse Right to Be Abolished
FSS: "Aiming for Implementation as Early as the First Half of Next Year"
The Financial Supervisory Service announced on the 22nd that it will operate a task force (TF) to improve the system and reduce risks associated with accounts receivable-backed loans (ARB loans) by the end of the year. The task force plans to discuss measures such as shortening the settlement cycle (maturity) from the current 90 days to 60 days.
ARB loan products with recourse rights have been criticized for the risk that the default of a purchasing company could be transferred to the selling company. The recourse right allows the bank to demand repayment from the selling company (usually a small or medium-sized enterprise) if the purchasing company (typically a large corporation) fails to pay by the settlement date of the accounts receivable.
For example, in the case of Homeplus, ARB loans are recorded as liabilities for Homeplus and as receivables for the manufacturer. The manufacturer can use these receivables as collateral to obtain loans from financial institutions. If Homeplus encounters issues and fails to pay by the settlement date, financial institutions have no choice but to demand repayment from the manufacturer, which has become a problem.
The Financial Supervisory Service stated that, together with the banking sector, the Korea Federation of Banks, and the Korea Financial Telecommunications & Clearings Institute, it will form a task force to discuss measures such as shortening the settlement cycle and gradually abolishing the recourse right by the end of the year.
Banks currently operate ARB loan settlement cycles of up to 90 days. The Subcontracting Act and the Act on the Promotion of Collaborative Cooperation stipulate, in principle, a settlement cycle of 60 days. When using ARB loans or other promissory note alternatives, these laws require that any interest incurred for settlement periods exceeding 60 days must be paid by the purchasing company.
The task force is considering reducing the maturity of accounts receivable and ARB loans to within 60 days, in line with the legal settlement cycle.
The task force is also discussing the gradual abolition of the recourse right system, given that the ARB loan delinquency rate stood at just 0.02% last year, significantly lower than the 0.43% delinquency rate for general corporate credit loans. Instead, the task force aims to promote the use of accounts receivable insurance. Overcoming challenges such as the insurance premium burden on small and medium-sized enterprises and the lack of guarantee resources at guarantee institutions remains a task.
The task force will also discuss ways to further activate the Win-Win Payment Loan, which helps partner companies secure funding. The Win-Win Payment Loan is a system that enables second- and third-tier partner companies to convert their accounts receivable, issued by first-tier partners, into cash early at low financing costs equivalent to those of purchasing companies.
However, some banks have limited the eligible purchasing companies for the Win-Win Payment Loan to only high-quality large corporations and public institutions, which has led to criticism regarding its effectiveness. The utilization rate among partner companies remains minimal.
The task force will review measures to ease the requirements for purchasing companies to use the Win-Win Payment Loan and ways to encourage greater use by second- and lower-tier partner companies. For example, it will consider providing incentives such as preferential interest rates to first-tier partner companies that issue accounts receivable to second-tier partners.
According to the Financial Supervisory Service, the annual early settlement amount for accounts receivable with maturities of 60 to 90 days could reach up to 117 trillion won. Interest expenses for companies using ARB loans could be reduced by up to 42 billion won per year.
A representative from the Financial Supervisory Service stated, "Through system improvements such as shortening the settlement cycle for accounts receivable and ARB loans, abolishing the recourse right, and promoting alternative measures, the financial burden on small and medium-sized enterprises and small business owners will be reduced, and financial accessibility will increase." The representative added, "Our goal is to implement the task force's recommendations by the first half of next year, if possible."
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