Pulling the Plug on Un-Revivable Small and Medium-Sized Enterprises

Starting January 2006, it will become difficult for companies on the brink with no hope of revival to receive credit guarantees from credit guarantee institutions.

In addition, a company with a fallen credit rating or a long-term credit guarantee will become subject to higher guarantee commissions.

On June 22, the government and the ruling Uri Party agreed on a “Plan for Stabilizing the Finances of the Korea Technology Credit Guarantee Fund (KOTEC) and Reforming the Credit Guarantee System,” which outlines the above changes.

The gist of this plan is the removal of the “oxygen mask” provided by the government to small- and medium-sized enterprises (SMEs) at their financial limit through a reduction in credit guarantee funds’ security deposits and an increase in their commissions.

This means that the government is trying to bring about a natural restructuring of SMEs by choking the “money line” of hopeless companies whose operating profits are not enough to pay off even the interest on their loans.

Accordingly, the usage limit for guarantees will be decreased and “supplementary commissions” will be charged to companies who have used their guarantees beyond a certain sum or period of time.

The government is currently debating a plan to scale back the 43 trillion won put up by KOTEC and KCGF (Korea Credit Guarantee Fund) last year in security deposits by three billion won each year.

The rate of the commission on loans, which is at 0.5~2.0 percent, will also be raised to 0.5~3.0 percent, thereby adding to the burden taken on by the companies themselves.

At the same time, the rate of the liability guarantee, which falls to the guarantee institution or the bank if a guaranteed company goes under, will be reduced from the current 85 percent. This means that companies will need to pay higher interest to the financial institutions issuing the loans.

A government official noted, “High guarantees of over a billion won take up roughly 40 percent of the security deposits paid by the KCGF. Long-term guarantees of 10 years or more also amount to some 13 percent.” He explained, “This indicates that companies with no competitiveness have continued to receive benefits.”

But there is criticism from certain quarters that the sudden cutback may cause SMEs, which are already facing tough challenges, to finally perish.

Because loans enabled by credit guarantee funds total 30.4 percent of all loans taken out by SMEs, a reduction in government support can drastically diminish a company’s funding.

A staff member of one SME argued, “If the government’s reform plan for the credit guarantee system is to take root, financial institutions’ backward loaning practices, which rely solely on collateral, must be changed first.”

Chang-Won Kim changkim@donga.com