KODIT to Boost SME Lending...Government to Guarantee Facility Investment Loans

KODIT Revises Special Contribution System for Financial Institutions

Facility Investment Loans for SMEs Now Covered by Special Guarantees

In Line with Growing Special Contributions to Expand Productive Finance

Guarantee Fee Deduction Ceiling Raised from 0.3 to 0.5 Percentage Points

Renewal Guarantee Benefits Maintained Only When Staying with Same Agreement Bank

The Korea Credit Guarantee Fund (KODIT) will expand the scope of agreement guarantees, which are supplied based on special contributions from financial institutions, to include funds for facilities investment. This move aims to lower the loan burden of financial institutions by providing guarantees even for funds that small and medium-sized enterprises (SMEs) borrow from banks to build factories or expand their machines and equipment. The guarantee system has been revised so that capital can flow into long-term facilities investment for SMEs, in line with the financial sector’s efforts to expand 'productive finance.'

According to the financial industry on July 28, KODIT recently amended the “Operating Guidelines for Agreement Guarantees on Special Contributions by Financial Institutions and Guarantee Fee Support,” adding facility funds to the scope of debts eligible for agreement guarantees based on special contributions. KODIT plans to implement the revised guidelines in the second half of the year, reflecting system improvements introduced in the first half. A KODIT official explained, “We have established the institutional foundation to respond to the diverse funding needs of companies.”

With the revised guidelines, the scope of guarantees will be expanded to cover facility funds used for the construction or expansion of factories, as well as the purchase of machinery and production equipment. Through the KODIT guarantee, banks can reduce the risk of loss from potential loan defaults, and SMEs will likely find it easier to secure facility investment loans that would have been difficult to obtain with only their own collateral or credit.

This is the first time that facility funds have been included as eligible for individual guarantees under the special contribution agreement guarantee program, which utilizes separate funds provided by financial institutions to offer preferential guarantees for loans from specific banks. Previously, when individual guarantees were provided based on special contributions from financial institutions, eligible loans were limited to working capital. Working capital is used by companies for day-to-day business operations, such as employee wages, raw material purchases, and rent.

Until now, agreement guarantees based on special contributions from financial institutions have been primarily focused on working capital. This was in order to supply guarantees to a larger number of companies with limited contributed resources. As facility funds are used for investments in factories and equipment, the size of each loan is generally larger and the loan period longer than for working capital. There had been concerns that supporting facility funds in a situation where the size of special contributions is limited could concentrate guarantee provision to only a few companies, making it difficult for many SMEs to benefit.

However, as the government has recently emphasized productive finance by redirecting capital flows from the real estate sector to corporate facilities investment and innovative industries, the need has grown to expand the scope of special contribution guarantees to include facility funds. With an increase in special contributions from financial institutions, the purpose is to use these resources not only for short-term working capital but also for expanding SMEs’ production capacity and growth investments.

KODIT also plans to expand the guarantee fee benefits to reduce the financial costs for companies. Previously, the guarantee fee rate was reduced by up to 0.3 percentage points according to an enterprise’s Future Growth Potential Grade, and this reduction rate was fixed for three years after new guarantee issuance. Going forward, the maximum deduction for the guarantee fee rate based on the Future Growth Potential Grade will be increased to 0.5 percentage points. As a result, high-growth-potential SMEs will be able to take further advantage of reduced guarantee fees when using agreement guarantees based on special contributions.

A system revision is also being pursued to strengthen customer retention for agreement banks that make special contributions. From now on, in order for a company to continue receiving the guarantee fee support benefit agreed upon at the time of new guarantee issuance when using a renewal guarantee (which extends the guarantee maturity), it must continue to use the same agreement bank as originally contracted.

This means that if a company refinances its loan with another bank, the guarantee fee support benefit originally offered by the first agreement bank may be discontinued. Consequently, the incentive for companies to maintain their relationship with their initial lender is strengthened in order to continue receiving guarantee fee support, and banks that have made special contributions are anticipated to be better able to secure SME clients for the long term through preferential guarantees.

An official from the financial sector said, "Guarantees from KODIT based on special contributions have centered on working capital to support as many companies as possible with limited resources. However, with the productive finance expansion trend this year, and as special contributions from financial institutions are expected to increase, the conditions have now been created to broaden the support to include facility funds."

This content was produced with the assistance of AI translation services.