Loan holidays are extended for another six months

A poster for a restaurant in Seoul says it is difficult for small businesses to survive due to social distancing measures in place because of Covid-19, on Tuesday. [YONHAP]

Loan relief offered to small businesses hurt by the coronavirus pandemic will be extended for another six months, the country's financial authorities said Tuesday.

According to a joint statement by the Financial Services Commission (FSC), the Financial Supervisory Service, credit guarantee funds and major financial associations representing banks and insurance companies on Tuesday, small business operators will be able to request an extension of their debt maturities until the end of September.

The authorities said they agreed small and medium-sized enterprises (SMEs) and smaller business operators need more time to recover losses from the Covid-19.

The amount of deferred principal and interest payments as of the end of January totaled some 130 trillion won ($115.57 billion).

Relief programs were first put in place in April last year after the first wave of Covid-19. The programs were originally to last six months. This is the second round of six-month extensions.

Under the loan relief, small businesses are able to extend maturity of their loans taken out before March 31, 2020 by at least six months, if they can prove they were directly or indirectly affected by the Covid-19.

Even if the business operators already extended debt once, they can apply again if the extended maturity falls before the end of September.

For instance, if an SME had extended maturity of its debt to May last November, it could extend its maturity again in May.

To help small businesses pay back debt after loan relief programs end, business operators can consult with lenders to choose how they plan to pay back the principal and interest, the FSC said.

The financial authorities will give borrowers longer periods to pay back debt than the deferred period to prevent borrowers from facing too much to pay back at once after the relief programs end.

The FSC said "[some finanical companies said] two to three times the deferred period may be an optimal time to pay back debt" though the decision depends on the borrowers and it will not set a specific time or way of paying back debt.

On concerns government may be supporting zombie companies with their temporary loan relief, which could lead to financial companies holding bad debt, the FSC said in statement that there should be a clear distinction between companies that received loan relief due to Covid-19 and those that are unable to pay interest on loans even in normal economic situations.

"Our guideline states that our target companies are those that are 'temporarily cash-strapped' due to the Covid-19," the FSC statement noted. "They are companies that can slowly pay back debt if the economy recovers from the aftermath of the Covid-19 pandemic."

The FSC also said that the target companies must not have overdue principal and interest payments, impaired capital, or be closed down.

The FSC added that while it is true there is risk for financial companies to suffer difficulties from bad debt if the economy remains sluggish for a very long time, local financial companies have enough capacity to keep the programs for now.

On whether the relief programs will completely end in September, the FSC said the decision will be made later considering the economic situation and progress on the Covid-19 front.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]