As the arrears rate on loans to small business owners and the self-employed rises, the losses at credit guarantee institutions that backed those loans are also expanding. The guaranteed loan program of credit guarantee institutions is a policy under which, if a self-employed borrower cannot repay debt, the credit guarantee institution repays the debt on the borrower's behalf, with most of the funds covered by taxes.
On the 11th, according to a compilation by the National Assembly Budget Office of data received from the Korea Federation of Credit Guarantee Foudations (KOREG), the Korea Credit Guarantee Fund (KODIT), and the Korea Technology Finance Corporation (KOTEC), the amount of accidents—cases with arrears of three months or longer—in the guaranteed debt balance for small and micro businesses at KOTEC, KODIT, and regional credit guarantee foundations totaled 2.5612 trillion won from January to July this year. If this trend continues, this year's accident amount will be about 4.3 trillion won.
The accident amount was in the 1 trillion to 2 trillion won range each year from 2018 to 2022. But it surged to 4.1606 trillion won in 2023 and 4.5775 trillion won last year. Guaranteed lending to support the self-employed expanded starting in 2020 due to the impact of COVID-19, and as the economic downturn persisted, more borrowers were unable to repay their debts at maturity.
According to the Bank of Korea, the arrears rate on loans to the self-employed rose from 0.56% at the end of 2020 to 1.78% at the end of June this year. The arrears rate for vulnerable self-employed borrowers—those with low income and credit scores and multiple debts—rose from 4.99% to 11.34% over the same period. There are about 437,000 vulnerable self-employed borrowers, holding 130.2 trillion won in loans.
If a self-employed borrower who received a loan backed by a credit guarantee institution cannot repay the debt, the credit guarantee institution must repay it instead. The money repaid becomes, in accounting terms, a loss compensation item for the credit guarantee institution, and the institution then seeks to recover the loan by exercising a right of recourse against the borrower. However, because recoverability is low, most of the funds are covered by government contributions, that is, taxes.
The subrogation amounts at the Korea Credit Guarantee Fund (KODIT) and the Korea Technology Finance Corporation (KOTEC) rose from 848.8 billion won in 2022 to 1.4903 trillion won in 2023 and 1.9161 trillion won last year. From January to June this year, the subrogation amount was 1.0562 trillion won, raising the possibility that the annual total could exceed 2 trillion won.