[Edaily Reporter PARK JONG-HWA ] As the local economy in small business districts shows little sign of recovery, the number of small business owners unable to repay their debts is rising. Regional credit guarantee foundations are paying off debts on their behalf at a rate of about 5 billion won per day. Calls are growing for proactive debt restructuring to help small business owners get back on their feet.

According to data submitted by the Korea Federation of Regional Credit Guarantee Foundations to Rep. Oh Se-hee of the Democratic Party of Korea, a member of the National Assembly’s Committee on Trade, Industry, Energy, SMEs, and Startups, from 2024 through July of this year, the 17 regional credit guarantee foundations nationwide recorded 368,027 default cases involving small and medium-sized enterprises (SMEs) and small business owners, with a total default amount of approximately 6 trillion won. When financial institutions such as banks lend funds to small and medium-sized enterprises (SMEs) and small business owners, regional credit guarantee foundations act as guarantors for debt repayment; however, this year alone, there have been 68,477 default cases (totaling 1.2134 trillion won).

Rising Subrogation Payments Per Guarantee Default

This year, the highest number of guarantee defaults by regional credit guarantee corporations occurred in Gyeonggi (10,848 cases), followed by Seoul (9,840 cases), Busan (6,536 cases), North Gyeongsang (5,616 cases), and Daegu (4,993 cases). This indicates that default cases are concentrated in the Seoul metropolitan area, which has a large number of small business owners and SMEs, and in the Yeongnam region, which has long suffered from a sluggish local economy.

When a guarantee default occurs, regional credit guarantee foundations generally repay more than 90% of the total debt to financial institutions on behalf of the borrowers; the amount paid on behalf of SMEs and small business owners reaches several trillion won annually. In 2024 and last year, each credit guarantee foundation made subrogation payments exceeding 2 trillion won, and this year alone, subrogation payments totaled 1.1394 trillion won through July. This means that regional credit guarantee corporations are effectively paying off the debts of small business owners and SMEs at a rate of 5 billion won per day. While the rate of increase in guarantee defaults has slowed compared to last year, it is noteworthy that the average subrogation payment per default (16.5 million won) has risen compared to last year’s figure (15.6 million won).

Although regional credit guarantee corporations can recover the subrogation payments by exercising their right of recourse after initially paying off the debts on behalf of borrowers, the recovery rate remains in the single digits. This means that even as time passes, the financial situation of small business owners and SMEs is unlikely to improve easily. As a result, both the regional credit guarantee corporations making these subrogation payments and the Korea Credit Guarantee Fund, which provides re-guarantees for the regional corporations’ guarantees, are now at the point of complaining about the financial burden. An official from a regional credit guarantee foundation stated, “With the budget for re-guarantees shrinking, if the domestic economy worsens, guarantee funds will inevitably dwindle rapidly,” adding, “Under current circumstances, we are facing a crisis where we may have to reduce new guarantees.” He noted that the economic shock to small business owners and SMEs, which began with the COVID-19 pandemic, continues to this day.

Delinquency Rates at SME Banks Hit 11-Year High

Banking sector indicators also show that the financial situation for SMEs and small business owners is deteriorating day by day. According to the Financial Supervisory Service, as of last May, the delinquency rate on loans to SMEs (sole proprietors) at domestic banks stood at 1.00%. This marks the first time in 11 years—since May 2015—that the delinquency rate for SME loans has reached the 1% range. The delinquency rate for loans to small and medium-sized corporations was even higher, reaching 1.11%. With domestic demand indicators, such as retail sales, remaining sluggish, it is unlikely that the financial situation of SMEs and small business owners will improve in the short term.

As the slump in domestic demand drags on, the government has decided to support the recovery of small business owners by resolving non-performing loans. Last June, the government announced that it would write off 1.1 trillion won worth of uncollectible loans held by regional credit guarantee corporations and sell 1 trillion won worth of loans to “bad banks” such as the Fresh Start Fund and the New Leap Fund, with the aim of facilitating debt write-offs and debt restructuring.

Professor Lee Jeong-hee of Chung-Ang University, president of the Small Business Policy Association, stated, “Because the economy is in such poor shape, there is a trend across the entire financial sector toward the deterioration of loans to small and medium-sized enterprises and small business owners.” She added, “While we need to alleviate the burden on these borrowers through debt restructuring, we also need to strengthen KOSME’s crisis detection capabilities.”