South Korean government to offer debt restructuring for small businesses burdened by pandemic loans

The South Korean government is launching a debt restructuring program targeting self-employed individuals and small business owners who accumulated significant debt during the COVID-19 pandemic. This initiative comes as a response to the increasing financial strain on these businesses, which are grappling with rising interest rates and a sluggish recovery in domestic consumption following the pandemic.

According to data from the Ministry of SMEs and Startups, out of 358.7 trillion won (approximately $260 billion USD) in loans extended to sole proprietors by banks and policy financial institutions between 2020 and 2023, 154.7 trillion won remains unpaid. Of this outstanding amount, 4.1% is over three months overdue, equating to roughly 6.3 trillion won (approximately $4.6 billion USD).

The government plans to address these long-term overdue debts held by financial public institutions by clearing them. The Export-Import Bank of Korea will be the first to write off 16.2 billion won in long-term non-performing specialized bonds issued to small and medium-sized enterprises, also canceling the debts of joint guarantors. Other financial public institutions are expected to follow suit in the latter half of the year by developing plans to write off or complete the statute of limitations for long-term overdue debts with low repayment prospects.

In addition to debt relief, the government is enhancing support for diligent borrowers who have consistently repaid their loans, addressing concerns about 'reverse discrimination' where responsible borrowers might be disadvantaged. The Export-Import Bank will introduce an interest rate reduction program in September for restructured companies that maintain timely debt payments. The Korea Credit Guarantee Fund also plans to incorporate diligent repayment history into its guarantee assessments. Furthermore, the government aims to expand policy financing for low- and middle-income individuals, increasing the supply of the 'Sunshine Loan' from 5.9 trillion won this year to 6.2 trillion won next year, and doubling the loan limit for young entrepreneurs from 5 million won to 10 million won per person.

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We are considering what criteria to use for the overdue period and how far back to consider loans related to COVID-19.