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People walk through a traditional market in Incheon, one of the participating cities for a nationwide campaign this month to promote small businesses and the self-employed, on May 9. Yonhap |
By Yi Whan-woo
The risk of default faced by small businesses and the self-employed throughout the COVID-19 pandemic is rising again, after the government declared an end to its classification of COVID-19 as a health crisis last week.
Its classification as a health emergency has been cited as the justification for the financial authority to repeatedly extend due dates for loans taken out by borrowers whose businesses suffered due to pandemic restrictions, to reduce time pressure in making repayments.
Furthermore, the government kept granting grace periods to borrowers, many of whom are small businesses and the self-employed, in making principal and interest payments until their sales recover to pre-pandemic levels.
"Under the circumstances, the end of the health emergency suggests that the government may no longer have a convincing reason to sustain its relief program for those borrowers," an official from a major commercial bank said on condition of anonymity, Tuesday.
The relief program has been extended five times since being introduced in early 2020, and will expire in September unless the government grants another extension.
The due dates for loans can still be extended ― every six or 12 months ― until September 2025 depending on the borrowers' financial condition even after the relief program ends.
However, they no longer will be given a grace period, and will be asked to resume principal and interest payments thereafter.
In a statement released on Tuesday, an advocacy group for small businesses and the self-employed expressed grave concerns on their behalf. "Sales have not fully recovered to make repayments on time in a routine manner," the group explained.
The group cited a need for the government to maintain the relief program, referring to its own survey conducted early this year in which 63.4 percent of the targeted borrowers saw their debts increase over the previous year.
"With such a tricky situation, the termination of the relief program could push those who are not ready to repay their loans to the brink of default," another official from a different bank said.
He noted the outstanding balance of the money they had borrowed from both banks and non-banking firms, such as credit card firms, which was already nearing 141 trillion won by the end of the first half of 2022.
Concerning the five largest banks in Korea ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― the remaining balance amounted to 36.62 trillion won as of April.
The official speculated that making repayments on time will be tough for many beneficiaries of the relief program.
According to the official, even those who were in better financial shape and thus were not eligible for the program, struggle with repayments following a steep rate hike and a prolonged economic slowdown.
The base rate was lifted by an aggregate of 3 percentage points since August 2021, bringing the rate to a 14-year high of 3.5 percent and increasing annual interest by 2 million won for all borrowers in general.
Correspondingly, the rate of delinquency in loan payments among all banks in the country was 0.36 percent in February, up 0.11 percentage points from a year earlier.
To reduce the burden on repayments and also to prevent borrowers from defaulting, Joo Won, deputy director of Hyundai Research Institute, suggested determining the monthly repayments "at an affordable level."
"We can't keep delaying loan payments over and over, but at the same time, we must make sure it's divided over a sufficient period of time to minimize the shock on borrowers," he said.