Banks likely to face pressure from new president to write off debts, reduce interest margins

President Lee Jae-myung enters the Presidential Office building in Yongsan, Seoul, Wednesday. Yonhap

Commercial lenders are expected to face growing pressure to extend loan maturities or write them off entirely, under President Lee Jae-myung’s initiative to support small businesses and the self-employed hit by the COVID-19 pandemic, market watchers said Wednesday.

Also in focus is whether lenders will lower discretionary premiums — or add-ons — a much-criticized method of protecting profit margins even after their borrowing costs fell following a recent Bank of Korea rate cut.

Banks say that so-called "mutual growth" financial aid packages are widely expected, amid criticism that their record profits come almost entirely from interest income — not because of significant innovation efforts or broader growth strategies.

But the lenders argue that the government should stop framing them as profiteers and ease and scrap excessive regulations that hinder their business expansions, digital drives and cryptocurrency asset services.

“It’s an extremely sensitive issue, given the transition to the new administration,” a banking industry official said, adding that many commercial lenders are likely to feel compelled to follow government directives to make "greater contributions" aimed at reducing the interest burden on low-income, vulnerable borrowers.

“Guarantee-backed loans may be partially recovered, but at the end of the day, an increase in unrecovered loans will undermine financial soundness," he said.

These concerns reflect Lee’s campaign pledge to grant loan maturity extensions, debt forgiveness and repayment deferrals as part of “comprehensive COVID-19 loan response measures.”

The measures are not significantly different from those implemented by the previous Yoon Suk Yeol administration, under which banks collectively provided tens of trillions of won in financial packages for pandemic-hit borrowers.

The challenge is that the drive is expected to be far more aggressive and effective than before, as Lee was elected with broader support on the promise of "economic revitalization" for small businesses and the self-employed.

According to data from the Bank of Korea, the number of vulnerable self-employed borrowers came to around 430,000 in December last year, up 52 percent from three years ago. Their loan delinquency rate rose to 11.16 percent, the highest in 11 years.

“Whether and by how much the financial aid package would be implemented remains to be seen. But the new administration’s financial policy drives will be judged on the efforts to enhance the regulatory environment and spur market reform,” the official said.

Lee plans to source public funds to help small businesses, including those affected by Yoon’s martial law declaration last December. He is also expected to set up what he has termed a “bad bank,” whereby bad loans held by financial entities will be bought for restructuring.