Debt restructuring is being pursued for 600 billion to 700 billion won in long-term arrears debt owed by self-employed people and micro business owners who borrowed during COVID-19. The micro business community welcomed the move, saying it "will be a chance to make a comeback."
The Korea Federation of Micro Enterprise (KFME) issued a commentary on the 30th, saying the government's move to prepare preemptive and comprehensive measures to ease the burden on micro businesses "reflects the voices on the ground and is a timely step."
The federation noted that during COVID-19, micro business owners saw sales plunge as they faced operating restrictions due to government quarantine measures, and they had no choice but to rely on loans for survival because compensation for losses was insufficient.
It added that the government's latest measures are significant in that "it has laid a practical ladder for a full comeback of micro business owners by moving to provide step-by-step support from active restructuring of long-term arrears debt to credit restoration and recovery of capacity for economic activity."
Earlier, on the 28th, at a joint meeting of the Emergency Economic Headquarters and Ministers on the Economy presided over by Deputy Prime Minister and Minister Koo Yun-cheol, the government announced "support measures for vulnerable borrowers in a period of rising interest rates."
The government plans to restructure the debt of individual business owners who took out loans during 2020–2023, the COVID-19 period, and have been in arrears for three months or longer.
According to the Ministry of SMEs and Startups, loans executed by banks and policy finance institutions to individual business owners from 2020 to 2023 totaled 358.7 trillion won. Of this, the outstanding balance that has not yet been repaid is 154.7 trillion won, or 43.1%.
The amount in arrears for three months or more is about 6.3 trillion won. Including this, the government is reviewing about 6 trillion to 7 trillion won as the target for debt restructuring.
The government will restructure debt by purchasing and extinguishing long-term delinquent claims. It will buy and extinguish delinquent claims outstanding for seven years or more, and it is also pushing a plan to extinguish in bulk claims that have remained unpaid for 20 years or longer.
It will also expand eligibility for refinancing loans that lower high-interest loans of 7% or more a year to around 4.5% a year. It will introduce an artificial intelligence (AI)-based "micro business–specialized credit scoring model (SCB)" that uses nonfinancial information to evaluate the future growth potential of micro businesses.
Underlying the measures is the view that during COVID-19, the government's role for micro business owners was insufficient, concentrating the liability burden on households and the self-employed.
President Lee Jae-myung, at a Ministry of SMEs and Startups briefing on the 4th, said of the situation during COVID-19 that "there were aspects in which the government shifted what it should do onto micro business owners and the self-employed," adding, "it seems the government should boldly take on a role to some extent."
Lee said, "During COVID, other countries provided government support and the government took on the responsibility. Because of this, the ratio of Government Bonds rose and household liability ratios either held steady or fell, but in our case, the Government Bonds ratio did not rise and the household liability ratio rose sharply."
To address potential fairness concerns if support is given only to long-term borrowers in arrears, the government will also expand financial support for diligent repayers.
It will strengthen financial support, including preferential interest rates and higher loan limits, for small and medium-sized enterprises and micro business owners who have been diligently repaying their loans. It will also expand the preferential range for the Korea Credit Guarantee Fund (KODIT) guarantee fee rate from the current 0.3 percentage point to up to 0.4 percentage point.
On this, the federation said it is also encouraging that "in addition to support for long-term borrowers in arrears, the government decided to strengthen financial incentives such as preferential interest and guarantee fees and higher loan limits for micro business owners who have been diligently repaying their debt."
It added that this is a measure that "can enhance the balance and acceptability of the policy by supplementing fairness issues that may arise in the debt restructuring process and minimizing the relative deprivation felt by diligent repayers."
However, the federation stressed that the measures must work properly at bank counters in practice. It said, "We urge the government and the financial sector to execute swiftly and monitor closely so the measures do not become pie in the sky due to delays at bank counters or onerous conditions."
Specific targets and scale for debt restructuring and the level of reductions are expected to be finalized in the fourth quarter this year.