The council of provincial governors, made up of heads of metropolitan governments nationwide, asked the government to raise financial companies' grants rate to the Korea Federation of Credit Guarantee Foudations (KOREG) and regional credit guarantee foundations (regional credit guarantee foundations) by about threefold. They said the accumulated deficits at credit guarantee foundations are shrinking the guarantee capacity for local small merchants and small and midsize corporations, but voices in the financial sector argue 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 the statutory grants rate that financial companies pay to credit guarantee foundations (based on corporations' outstanding loan balance) should be raised from the current 0.05% to 0.14%. The council said, "Compared to other institutions, the grants rate is markedly low, deepening a deficit in subrogated repayments relative to contributions income," and added, "Demand for financing among local small merchants is on the rise. In particular, it is necessary to expand the guarantee base for vulnerable small merchants facing declining sales and lower credit."
Regional credit guarantee foundations provide guarantees so that local small merchants and small and midsize corporations with low credit scores can borrow from financial companies. If small merchants or small and midsize corporations cannot repay their loans, the regional credit guarantee foundation repays them instead. When the guarantee amount is large, the federation re-guarantees 30% to 50% of the guaranteed amount. At that time, the federation pays the re-guaranteed amount to the regional credit guarantee foundation. The guarantee risk is split between the federation and the regional credit guarantee foundation.
Amid a recent downturn in regional economies, subrogation rates at the federation and regional credit guarantee foundations are soaring. According to data the federation submitted to People Power Party lawmaker Park Seong-hoon, subrogated repayments on general guarantees by the 17 regional credit guarantee foundations reached 2.2084 trillion won last year. Following the record-high 2024 figure (2.4005 trillion won), it stayed in the 2 trillion won range for the second straight year. With the increase in subrogated repayments, the credit guarantee foundations are currently in a state of capital impairment.
To reduce regional credit guarantee foundations' deficits and increase guarantees for small merchants and small and midsize corporations, the government temporarily raised the financial sector's statutory grants rate from 0.04% to 0.07% starting in Jun. 2024. In Jun. this year, the grants rate will return to 0.04%. The need to raise the regional credit guarantee foundations' grants rate was discussed during the president's ministry-by-ministry policy briefings on Jan., but there has been no further movement since. If the grants rate returns to 0.04%, the credit guarantee foundations' deficit is expected to grow further.
Financial companies, which pay roughly 1 trillion won in contributions each year, are reluctant to see the grants rate increased. The financial sector criticizes regional credit guarantee foundations for causing insolvencies by focusing on guarantee supply performance to match contributions without managing soundness. Local governments are also passive about grants to regional credit guarantee foundations. The Seoul Metropolitan Government budgeted 42.3 billion won in 2024 as contributions to the Seoul Credit Guarantee Foundation, but only 18.9 billion won was actually reflected.
There are also calls for regional credit guarantee foundations to revamp their operating model instead of relying on the grants rate. Lim Hyeong-jun, a senior research fellow at the Korea Institute of Finance, said, "Rather than simply discussing a hike in the grants rate to improve financial soundness, the federation should focus on structural improvements so it can achieve policy goals on a stable footing."