The Korea SMEs and Startups Agency (KOSME) is introducing a system to more accurately value real estate pledged as collateral by companies that have fallen behind on policy loan repayments. Before moving to secure claims through steps such as provisional seizure, the agency plans to consult professional appraisal firms to determine whether such action would be worthwhile. The move is seen as an effort to strengthen the soundness of its funds at a time when concerns are mounting over bad policy loans amid worsening conditions for small and midsize businesses.
KOSME will begin operating a system tentatively named the "real estate price consultation request system" starting next year, according to related agencies on the 15th. Before freezing the assets of companies in arrears on policy loans, KOSME conducts a "feasibility review" to assess the likelihood of recovery. The core of the new system is obtaining real estate valuation reports from professional appraisal firms during that process. KOSME is considering an arrangement under which appraisal firms would return estimated prices within three business days. A pilot program began last month, and the agency plans to formally adopt the system next year after correcting any shortcomings.
KOSME decided to enlist outside experts to improve the effectiveness of claim protection and, ultimately, recovery measures. The feasibility review is the stage at which the agency analyzes an asset's value and the size of senior claims to determine whether creditors would actually recover any money if the property were put through auction or other recovery procedures. If the asset is valued incorrectly at this stage, there is a risk that the figure will come out significantly lower once a formal appraisal is conducted after auction proceedings begin. For KOSME, that would mean wasting administrative costs and time while losing the chance to recover its money.
Until now, in-house staff have estimated real estate prices themselves during feasibility reviews. But there were limits to how well non-specialists could value properties such as factories and warehouses, for which market price data is unavailable. "Some properties are harder to value, and both accuracy and speed varied depending on the skill level of the individual employee," a KOSME official said in explaining the reason for the new system.
The underlying driver is concern over bad policy loans. With high interest rates and weak domestic demand straining the finances of companies that have borrowed from KOSME, the need to prevent defaults has grown. According to data submitted by KOSME to the office of Rep. Cha Gyu-geun of the Rebuilding Korea Party, the share of outstanding policy loans held by marginal firms rose from 3.52% in 2021 to 6.24% in 2024, 6.21% last year and 6.33% in the January-August period this year. The share held by companies with complete capital impairment was 2.84% in 2021 but climbed above 5% beginning last year, reaching 5.42% in the first eight months of this year. The number of policy loan delinquencies has also been rising, at 14,568 in 2022, 18,228 in 2023 and 20,660 in 2024.
KOSME plans to select the appraisal firm that will handle the program next year in the near future. Based on the volume of feasibility reviews in previous years, the agency has set next year's consultation requests at about 5,800 cases. It is also pursuing other measures to strengthen fund soundness, including upgrading its policy program evaluation model (K-ACE) to screen eligible companies more precisely and improving its early-warning system for at-risk firms.