Economic Recession Hits Private Loan Market

“So, you’re in the construction business. We don’t do business with contractors these days.”

A promissory note buyer said over his cell phone, while answering the phone call he received during an interview in a café in Seoul’s Myongdong with Dong-A on September 6.

Building subcontractors’ promissory notes are rated C, or likely to bounce, in the private loan market in Myongdong. The discount rate is 1.5-two percent a month, or 18-24 percent a year, but hardly anybody cares.

“When I said discounting promissory notes is impossible, he begged me to discount a current account check,” the buyer said.

When a company receives a loan with a one-month postdated check, the discount rate is about 27 percent. It is an extreme measure, but companies which barely stay afloat day-to-day do it anyway.

“Inquiries about promissory note discounts doubled during the second half since the October 29 measure against rising real estate prices. However, only one out 10 notes is not risky,” the buyer said.

However, the number of inquiries drastically dropped in September. Expectations for a pickup in business in the period leading up to Chooseok holidays evaporated. Usually, during the 20 days prior to Chooseok, there is a rise in demand for loans, which in turn raises discount rates by 0.3-0.5 percent. The rates remain unchanged this year.

Demand for cashing gift certificates, a quick way for individual consumers to receive money, is falling. Two or three years ago, there were about 100 lenders who took gift certificates. Currently there are 20-30.

The unprecedented economic recession recoiled the private loan market, stepping up financial pressure on small- and mid-sized companies.

Small- and mid-sized companies which don’t have collateral or credit histories are even being overlooked in the loan market and left to resort to unconventional methods in accessing capital.

A typical example was an information technology firm’s attempt to get a series of endorsements of promissory notes as a way to inflate their credibility. Here’s how it works: B endorses notes issued or owned by A; C endorse B’s notes; and A endorses C’s notes to manipulate the risk ratings of the notes.

Credit card loans, in which lenders charge 20 percent in fees after using corporate cards which have spending limits higher than individuals as a security, is another method used by small- and mid-sized companies.

Some Kosdaq-listed companies use their own stock shares as collateral in order to receive private loans. To borrow three billion won, they need 10 billion won worth of shares. A condition is attached to the loan, which allows lenders to sell the shares on the market if the price of the shares falls by 20-30 percent compared to the date of the loan contract.

“Most offerings by large shareholders in the Kosdaq market are actually sales by lenders,” a Kosdaq insider said.

This type of floating, which previously usually took place once or twice a month, happened six times in August.

“The number of bankruptcies reflected in official statistics probably stands still,” said a lender in Myongdong. “However, the rate of bankruptcies we feel daily has already reached a critical point.”

Cheol-Yong Lee lcy@donga.com