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| Financial Services Commission Chairman Koh Seung-beom attends a meeting at Korea Federation of Banks in Seoul, Thursday. Korea Times file |
By Lee Kyung-min
Concerns are mounting that the recent government decision to extend forbearance, whereby small businesses, self-employed and low-income earners are able to pause principal and interest payments on their loans for a designated period of time, will pose a major threat to the country’s fiscal soundness for the incoming administration.
The yearlong emergency financial assistance measures to help small businesses cope with the COVID-19 pandemic could result in a faster buildup of non-performing loans, the management of which will become much harder for creditors, or lenders, with their financial soundness facing the possibility of a rapid decline.
The lengthening of relief measures is understandable due in large part to stricter government-imposed social distancing rules including gathering bans and shortening of business hours.
Yet the difficulty of how to correctly discriminate between businesses in a healthy financial condition from those with questionable profitability will remain a staggering challenge for lenders and the financial authorities, a reason why financial research institutes say the instability risk should be closely monitored in the coming months.
A reduction in borrowing rates should be considered apart from the forbearance scheme, some economists say, since the amount of debt will pile up faster due to how interest rates are designed.
Korea should, they add, look to how the U.S. entered into a chronically low interest-rate period in the aftermath of the global financial crisis in 2009, a result of the U.S. central bank pumping in liquidity for an extended period of time to save insolvent banks.
The repeat of such a scenario is highly concerning, since the expansionary monetary policy by Bank of Korea will lead to a devaluation of the currency, which in turn will trigger an entirely different set of foreign exchange complications for Korea whose currency is not among those of global reserves and therefore highly vulnerable to external shocks.
Six more months
The ruling Democratic Party of Korea (DPK) and Financial Services Commission (FSC) said Wednesday that it would extend the maturity of small business loans and suspend debt repayment until March next year.
It was the third such extension since the beginning of the pandemic in April last year, followed by two six-month extensions thereafter.
Of the total 120.7 trillion won ($103 billion) in outstanding small business loans, 1.7 trillion won, or 1.4 percent, as of July is categorized as non-performing, defined as the amount on which a borrower has been defaulting for over three months in paying principal or interest due to a suspension or permanent shutdown of a business.
The 120.7 trillion won is part of 222 trillion won forborne as of July. Over 209.7 trillion won was of extended maturity, whereas payment of 12.1 trillion won in principal and 200 billion won in interest payable were paused, respectively.
The FSC maintains that the financial sector should be able to withstand the measure, since they can sufficiently offset losses through loss reserves. The loss ratio for the banks in the country averaged 155.1 percent as of June.
Seoul National University economist Lee In-ho said the relief scheme is politically motivated ahead of the presidential election next year.
It is understandable to extend forbearance for months to come, since many small businesses are crumbling due to the prolonged restrictions, in his view, but the efficacy of fiscal spending will be undercut further by vote-seeking lawmakers and policymakers under the current administration.
“If the authorities cared about fiscal soundness, they should have known better than to spend extra budgets on cash hand-outs to almost 90 percent of the county’s population, a considerable part of which are salaried workers relatively insulated from the fallout of the pandemic,” Lee said.
Whether the country would experience a series of bankruptcies by debt-laden small businesses remains to be seen, in which case the financial sector will bear the full consequences.
“It is up to economic and financial policymakers to limit what could and should have been preventable incidents,” he added.
[ANALYSIS] Gov’t loan forbearance to burden incoming administration next year
Source: Buhay Kapa PH
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