Banks mull W2tr in cash back for small-business owners

Local banks are considering a financial support program worth 2 trillion won ($1.52 billion) for owners of small businesses by giving back a part of their loan payments, amid prolonged inflation and high interest rates.

The measure was discussed Thursday during a task force meeting of local financial institutions and regulatory bodies aimed at finding means to support the public livelihood, industry sources said Sunday.

The first of the collective efforts is set to be a cash-back rewards scheme for business loans offered at rates over 5 percent as of the end of this year. Self-employed individuals and mom-and-pop shop owners would receive up to 1.5 million won per 100 million won in loans returned next year.

Real estate lessors with a business loan will not get the benefit, the sources said.

Details as to when and how frequently to provide the returns have not been confirmed yet. But industry officials expect quarterly allocation in order for the measure to bring consistent easing to the financial burdens of interest payments.

The rate of reduction will be differently applied according to the loan interest rate, with those with higher rates getting bigger cuts, while the baseline for the average reduction rate will be set at 1.5 percentage points.

With a total of 18 companies – including the major and regional banks and internet-only lenders – partaking in the support program, the financing through interest return is estimated to be worth around 2 trillion won, which is around 10 percent of the participating institutions’ combined net profit in 2022 of 18.93 trillion won, according to a simulation from the Korea Federation of Banks.

Since the start of this year, the Financial Supervisory Service, the nation’s top financial watchdog, has been urging the banking sector to step up efforts to protect the self-employed and small-enterprise owners who are affected most by surging interest rates.

A “windfall tax” has been proposed, which, if enforced, would require banks to make a “contribution” of around 2 trillion won to share excessive profits gained through higher interest rates in the form of funding for financially vulnerable groups.

Amid increasing pressure, the banks federation and 20 commercial banks came together with financial regulators last month and formed the task force to voluntarily discuss means for mutual growth with small and self-employed operators.

The finance sector has been seeking ways to fund an extra 2 trillion won on top of the previously announced measures by the regulatory bodies and individual banks.

The total amount will be distributed through 18 participating banks according to their company size and allocated autonomously to borrowers based on a general guideline.