Unpaid guarantees four times larger than reported, audit finds — policy finance distorted

Significant gaps have been found in how regional credit guarantee foundations across South Korea manage their guarantees. The volume of guarantees that remained active in their systems even after borrowers had fully repaid their loans exceeded 2.53 trillion won (approximately $1.65 billion), distorting the allocation of policy finance — including the over-assignment of reinsurance limits to foundations in the Greater Seoul area.

According to a targeted audit report on regional credit guarantee foundations and the Korea Federation of Credit Guarantee Foundations released by the Ministry of SMEs and Startups, the federation had recorded the nationwide total of unresolved guarantees at approximately 615.5 billion won as of 2024. The actual figure confirmed during the audit, however, was approximately 2.534 trillion won — 1.9185 trillion won more than what the federation had been tracking.

Regional credit guarantee foundations are policy finance institutions that provide guarantees enabling small enterprises and small business owners with insufficient collateral to obtain bank loans. They operate in all 17 cities and provinces across the country, and the Korea Federation of Credit Guarantee Foundations reinsures a portion of the guarantees each foundation issues.

When a small or medium-sized enterprise or small business owner repays a bank loan, the bank must notify the regional foundation, which must then cancel the corresponding guarantee. The volume of unresolved guarantees is directly tied to how the federation distributes reinsurance limits: a foundation that underreports its unresolved guarantees appears to have less guarantee capacity, allowing it to receive a larger reinsurance allocation from the federation.

In practice, the Seoul Credit Guarantee Foundation should have returned 435.9 billion won in reinsurance limits but instead received an additional 75.2 billion won, according to the Ministry of SMEs and Startups. The Gyeonggi Province foundation should have returned 137.7 billion won but received an additional 70.6 billion won, and the Incheon foundation, which owed a return of 17.9 billion won, received an additional 17.3 billion won.

The concentration in the Greater Seoul area was particularly pronounced. The audit found that foundations in the metropolitan area received a combined 754.6 billion won in excess reinsurance limits — roughly 78 percent of all over-allocations nationwide. The Seoul foundation's excess share stood at 10.8 percent of total limits and the Gyeonggi Province foundation's at 4.4 percent, both far above the national average of 2.3 percent.

The imbalance could ultimately undermine equity in policy finance across regions, the audit said. Because reinsurance resources are finite, excessive allocation to certain areas reduces the guarantee capacity available to small businesses and small business owners elsewhere.

The audit also found that the distortions affected guarantee program evaluations and the distribution of statutory contributions. The federation applies differentiated statutory contributions based on each foundation's guarantee program evaluation score, and some evaluation metrics incorporate outstanding guarantee balances and guarantee utilization ratios — both skewed by the unresolved guarantees. Program evaluation rankings shifted as a result, depending on how much each foundation's outstanding balance changed.

The Seoul and South Jeolla Province foundations were ranked incorrectly. Seoul received approximately 180 million won more in statutory contributions than it should have, while the South Jeolla Province foundation received the same amount less.

The management failures also caused direct harm to small business owners. The audit found that 14 regional credit guarantee foundations — including those in Gyeonggi Province, Seoul and Incheon — failed to properly process guarantee cancellations and settlements even when borrowers had made installment repayments. In some cases, guarantee fees that should have been refunded were recorded as zero, pointing to settlement errors.

As a result, 3,971 guarantee holders nationwide were not refunded a combined 557.44 million won in guarantee fees. The average unreturned amount per person was approximately 140,000 won.

Some foundations said the problems arose because banks had notified them of incorrect repayment amounts, but the audit concluded that ultimate responsibility rested with the foundations. Even when a bank's notification was wrong, foundations can correct the records through their own systems, and any losses from settlement errors are ultimately passed on to small enterprises and small business owners, the audit said.

The audit also found that regional foundations and the federation had been indiscriminately extending debt repayment periods for small and medium-sized enterprises and small business owners. One case involved a repayment schedule stretched to 88 years, requiring a borrower to remain in debt until age 147. The Gyeonggi Province Credit Guarantee Foundation contracted with a debtor identified as "A" — with an agreed loan amount of 105.56 million won — for a maximum term of 88 years, exceeding the standard maximum by 72 years.

A federation official said the organization plans to conduct periodic checks through system improvements going forward.