Regional credit guarantee foundations sitting on 1.9 trillion won in unresolved guarantees after loan repayments

Regional credit guarantee foundations across the country have significant gaps in how they manage guarantees, with more than 2.5 trillion won ($1.8 billion) in guarantees remaining active in their systems even after the underlying loans have been fully repaid. The oversight failure has distorted the allocation of policy finance, including the over-assignment of re-guarantee limits to foundations in the greater Seoul area.

According to a special audit report on regional credit guarantee foundations and the Korea Credit Guarantee Federation released by the Ministry of SMEs and Startups, the federation had recorded roughly 615.5 billion won ($444 million) in unresolved guarantees nationwide as of 2024. The actual figure confirmed during the audit, however, stood at approximately 2.534 trillion won ($1.83 billion) — some 1.9185 trillion won ($1.39 billion) 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 Credit Guarantee Federation re-guarantees a portion of the guarantees each foundation issues.

<style ref="s0">Unresolved guarantees underreported — some foundations received more statutory contributions after rankings shifted</style> When a small or medium-sized enterprise or small business owner repays a bank loan, the bank must notify the relevant regional foundation, which must then cancel the guarantee for that amount.

The unresolved guarantee figure is directly tied to how the federation allocates re-guarantee limits. When a foundation underreports its unresolved guarantees to the federation, it appears to have less guarantee capacity than it actually does, allowing it to receive a larger re-guarantee limit from the federation.

In practice, according to the Ministry of SMEs and Startups, the Seoul Credit Guarantee Foundation should have returned 435.9 billion won ($315 million) in re-guarantee limits but instead received an additional 75.2 billion won ($54 million). The Gyeonggi Province foundation should have returned 137.7 billion won ($99 million) but received an additional 70.6 billion won ($51 million), and the Incheon foundation, which should have returned 17.9 billion won ($13 million), received an additional 17.3 billion won ($12 million).

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 ($545 million) in excess re-guarantee limits, accounting for roughly 78 percent of all over-allocations nationwide. The Seoul foundation's excess share was 10.8 percent of total limits and the Gyeonggi Province foundation's was 4.4 percent — both far above the national average of 2.3 percent.

The imbalance could ultimately undermine equitable access to policy finance across regions. Because re-guarantee resources are finite, excessive allocation to certain areas reduces the guarantee capacity available to small business owners and small and medium-sized enterprises elsewhere.

The audit also found that the distortions affected guarantee project evaluations and the distribution of statutory contributions. The federation allocates statutory contributions on a differentiated basis according to each foundation's guarantee project evaluation score, and some evaluation indicators incorporate unresolved guarantee balances and guarantee utilization multiples. As a result, shifts in each foundation's guarantee balance affected its ranking in the evaluation.

The Seoul and South Jeolla Province foundations were ranked incorrectly, with the Seoul foundation receiving approximately 180 million won ($130,000) more in statutory contributions than it was entitled to, while the South Jeolla Province foundation received the same amount less.

<style ref="s0">Poor management translates into losses for small business owners</style> 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, refundable guarantee fees were recorded as zero, indicating settlement errors.

As a result, 3,971 guarantee holders nationwide did not receive a combined 557.44 million won ($403,000) in guarantee fee refunds they were owed. The average unreturned amount per person was approximately 140,000 won ($101).

Some foundations attributed the problems to banks notifying them of incorrect repayment amounts, but the audit concluded that ultimate responsibility rests with the foundations. Even when a bank's notification is wrong, foundations can correct the figures through their own systems, and the losses from settlement errors are ultimately passed on to small enterprises and small business owners, the report 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 repay until age 147. The Gyeonggi Province Credit Guarantee Foundation had drawn up a contract with borrower A, whose agreed loan amount was 105.56 million won ($76,000), setting the maximum repayment period at 88 years — 72 years beyond the standard limit — effectively obligating the borrower to repay until age 147.

A Korea Credit Guarantee Federation official said the organization plans to conduct periodic checks through system improvements going forward.