Political pressure results in 4th loan extension, instigating moral hazard

President Moon Jae-in enters a press conference at the Korea Federation of Banks in central Seoul to announce emergency measures to support the self-employed as well as small and medium enterprises stricken by pandemic-induced measures, in this photo taken in April 2020. The financial authorities will extend the rollover on loan payments by small business owners for the fourth time after implementing the first rollover in April 2020. Korea Times file.

By Yi Whan-woo

The financial authorities will again extend the deadline for loan payments by pandemic-stricken small business owners, reversing its decision that repayments should start when the grace period ends in March.

According to political and financial sources, this reversal made by the Financial Services Commission (FSC) this week comes after repeated demands from ruling Democratic Party of Korea (DPK) lawmakers in the lead-up to the March 9 presidential election.

The pressure is seen as a vote-buying scheme, and is feared to instigate moral hazard among heavy debtors who have already been given extended rollovers three times since April 2020 as part of a relief program.

Some sources speculate the fourth deadline extension will make it harder to figure out which borrowers face worsened financial situations, and accordingly, are on the brink of default.

According to data from the nation's five major banks ― KB, Shinhan, Hana, Woori and NH NongHyup ― the total amount of principal and interest for which payments have been postponed due to the relief program reached 139.4 trillion won ($116.8 billion) as of the end of last month.

“The interest rates offered by the top-tier banks are among the lowest in the market, and if there are people who are unable to pay back their loans, it means they are possibly in an unrecoverable financial situation,” a source said. “And the longer the rollover is extended, the bigger the risk will grow.”

Industry analysts say normalizing the loan program will get trickier as the DPK is likely to ramp up pressure for the time being.

The extended rollover was introduced partly because small business owners opted to lay off employees and save operating expenses to counter a drop in sales amid protracted social distancing rules.