The Korea Federation of Credit Guarantee Foudations (KOREG)'s re-guaranteed amount for loans to small and midsize construction firms rose more than 10% in one year, outpacing the increase for the vulnerable self-employed sector. An increase in re-guarantee balances in construction means more small construction companies are unable to secure loans from financial institutions. If construction companies fail to repay their debts, KOREG, which is on the brink of complete capital erosion, is expected to face a heavier burden.
According to the Korea Federation of Credit Guarantee Foudations (KOREG) on the 10th, KOREG's re-guarantee balance for the construction sector stood at 1.4992 trillion won at the end of Sep., up 10.9% from Sep. last year (1.352 trillion won). That is higher than the growth rate for food and accommodation, a representative self-employed sector (1.7%). It also contrasts with declines in wholesale and retail (down 1.1%) and services (down 0.23%).
Regional credit guarantee foundations (regional Shinbo) provide guarantees so microbusiness owners and small and midsize enterprises with low credit can receive loans. When the guarantee amount is large, KOREG re-guarantees 30% to 50% of the guaranteed amount. If a company fails to repay its debt, the regional foundation repays on its behalf, and KOREG pays the re-guaranteed amount to the regional foundation. The risk of the guarantee is split between KOREG and the regional foundations.
From January to September this year, the supply of re-guarantees in construction was 848.4 billion won, up 19.1% from the same period a year earlier (712.2 billion won). That is higher than the growth rate for manufacturing (10.8%), services (10.2%), wholesale and retail (9.7%), and food and accommodation (12.8%) in the same period.
If a construction company fails to repay its debt, the bad debt transfers from the regional foundation to KOREG. KOREG is on the verge of complete capital erosion, unable to absorb the bad debt that swelled after COVID-19. If construction-sector defaults add to that, government and bank contributions that fund the system will need to be expanded further. Banks' contribution rate, which was 0.02% through 2020, was temporarily raised to 0.07% from last year through 2026.
KOREG's total capital exceeded 1 trillion won at the end of 2022 but plunged to 272.3 billion won last year. Over the same period, the liability ratio rose from 125.1% to 449.8%. Given that KOREG's paid-in capital stood at 3.6577 trillion won last year, 90% of the capital has already been eroded.
In Sep., the financial authorities, together with the Ministry of SMEs and Startups, which oversees KOREG, commissioned a study to devise measures to improve the soundness of the credit guarantee system. The Financial Services Commission said, "There is a need to analyze the differing causes of the financial impact that rising subrogation payments have on KOREG and regional foundations and to develop fundamental and structural solutions, including changes to the way resources are allocated." The total subrogation payments by the 17 regional foundations nationwide from January to Oct. this year came to 1.9105 trillion won, with a subrogation rate of 5.09%.