The council of metropolitan mayors, made up of heads of regional governments nationwide, asked the government to raise by about threefold the grant rate that financial companies pay to the Korea Federation of Credit Guarantee Foudations (KOREG) and regional credit guarantee foundations (regional credit guarantee foundations). The reason cited was that accumulated deficits at the credit guarantee foundations are shrinking the guarantee capacity for local small merchants and small and midsize corporations, but voices in the financial sector say this amounts to plugging fund losses with private financial companies' money.
According to the financial sector on the 30th, the council recently conveyed to the government its view that financial companies' statutory grant rate to the credit guarantee foundations (based on corporations' outstanding loan balance) should be raised to 0.14% from the current 0.05%. The council said, "Compared with other institutions, the grant rate is markedly low, deepening deficits in subrogation payments relative to contribution income," adding, "Financial demand among local small merchants is on the rise. In particular, it is necessary to expand the guarantee base for vulnerable small merchants, such as those with declining sales or lower credit."
Regional credit guarantee foundations provide guarantees so that local small merchants and small and midsize corporations with low credit scores can receive loans from financial companies. At that time, KOREG re-guarantees 30% to 50% of the guaranteed amount. If the small merchants or small and midsize corporations fail to repay the loans, the regional credit guarantee foundation repays in their place, and KOREG pays the re-guaranteed amount to the regional foundation. The guarantee risk is split between KOREG and the regional foundations.
Amid a recent deterioration in regional economies, subrogation rates at KOREG and the regional foundations are soaring. According to data KOREG submitted to Rep. Park Sung-hoon of the People Power Party, last year subrogation on general guarantees at the 17 regional foundations reached 2.2084 trillion won. Following the all-time high in 2024 (2.4005 trillion won), it stayed in the 2 trillion-won range for the second straight year. With the increase in subrogation, the credit guarantee foundations have at times fallen into a capital impairment crisis.
To reduce deficits at the regional foundations and increase guarantees for small merchants and small and midsize corporations, the government temporarily raised the statutory grant rate for the financial sector to 0.07% from 0.05% starting in Jun. 2024. In Jun. this year, the grant rate will fall back to 0.05%. At a presidential policy briefing by ministries in Jan., the need to raise the grant rate for the regional foundations was discussed, but there has been no movement since. If the grant rate returns to 0.04%, the credit guarantee foundations' deficits are expected to grow further.
Financial companies, which pay about 1 trillion won in contributions each year, are balking at a higher grant rate. The financial sector criticizes that the regional foundations, without prudent risk management, focused only on guarantee supply performance in line with contributions, causing delinquencies. Local governments are also reluctant to grant to the regional foundations. Seoul budgeted 42.3 billion won in 2024 as contributions to the Seoul Credit Guarantee Foundation but actually reflected only 18.9 billion won.
There are also calls for the regional foundations to revamp their operating model instead of relying on the grant rate. Lim Hyung-joon, a senior research fellow at the Korea Institute of Finance, said, "Rather than simply discussing an increase in the grant rate, KOREG should focus on structural improvements so it can achieve policy goals on a stable footing to improve financial soundness."