Liquidity tap turned on for SMEs

Saenuri Party lawmaker Lee Joo-young, left, and Kim Seok-dong, chairman of the Financial Services Commission, right, hold a meeting at the National Assembly yesterday during which they agreed to abolish a joint liability system for small business owners. [YONHAP]

Self-employed business owners should find it easier to apply for loans from May as they will in most cases no longer be obligated to make a third party jointly liable as a debt guarantor.

The Financial Services Commission (FSC) announced a series of measures yesterday aimed at improving the financial environment for small and midsize businesses, with special attention being paid to helping people who start their own enterprises.

The new measures won the agreement of ruling Saenuri Party lawmakers earlier in the day.

In Korea, it has been a long-held practice for financial institutions to demand a joint surety from a third party when approving business loans.

The rule has been much criticized, however, as the person in question often has no direct involvement in management but is expected to repay the debt if the business falters - often leaving them saddled with enormous debts.

A similar law for personal loans was abolished in 1999, shortly after Korea became enveloped in the crippling Asian financial crisis.

While the new measure represents a step in the same direction, there are exemptions. For example, lenders can still demand joint liability when the business’s legal representative is not its owner. In such cases, the owner must serve as the second debt guarantor.

This is aimed at preventing the owner from transferring all responsibility for the debt to a proxy.

The new law also mandates that, for corporations, a senior executive must serve as the third party for loans. Previously, the law was more relaxed, with major shareholders allowed to fill the role.

The new measure will be applied for new loans in the banking industry from May, but is expected to be gradually expanded to other financial sectors such as the insurance industry.

For existing loans, the joint liability clause will gradually be phased out over the next five years, the FSC said, without providing details on how this would be achieved.

The agency said it expects about half of small business owners who currently have such loans, or 440,000 companies, to benefit from the changes over that period.

It also believes the move will help promote successful entrepreneurship as loans will not just be handed out indiscriminately, but will be based on a keener analysis of the company’s chances of turning a profit, such as what technology it has to offer. The law also aims to enhance the financial industry’s ability to review and evaluate business start ups.

“The financial industry has taken the wrong approach in the past by trying to prevent bad loans by relying on the joint liability system, rather than basing its evaluation on the competence of the person or firm taking out the loan, or the technology they possess,” said Jeong Eun-bo, head of the FSC’s financial policy department. “As a result, lenders had a weak system of evaluating the viability of loans and the companies’ creditworthiness.”

The new measures also included stronger support for entrepreneurs who are looking for a second chance after failing in their first attempt to run successful small or midsize firms.

A new committee will be set up under the Credit Counseling and Recovery Service to support them based on the merits of their case. Some may have up to 50 percent of the principal debt written off. Other will be granted additional capital if this is deemed appropriate.

However, only those with debts under three billion won ($2.7 million), and who possess a unique technology or industrial technique, will be eligible for the extra support.

Small and midsize entrepreneurs will also find it easier to restore their credit ratings. The FSC said it will allow some private business owners to apply for a credit recovery program even in situations where they have no income, while also deferring their loan repayments by up to two years.

By Lee Ho-jeong [ojlee82@joongang.co.kr]