A Credit Risk Analysis of Reassurement in Micro and Small Business Loan

When a small business applies for a loan from a financial institution in Korea, the regional Credit Guarantee Foundations provided guarantee for the loan, and the Korea Federation of Credit Guarantee Foundations (KOREG) provide reassurement to regional Credit Guarantee Foundations for a portion of the guarantee. We analyzed risk factors of reassurement in the Korean small business loans from 2006 to 2017 using more than million reassurement cases provided by KOREG. Estimation results from logit and fractional response model show that main risk factors in reassurement are variables related to intrinsic competitiveness of business, credit and collateral capabilities such as personal credit rating of business owner, age, size, type of business, ownership of plant and housing rather than variables related to guarantee or reassurement. We also compared the estimation results between normal period (2012~2014) and crisis period (2008~2009). There are many differences in the estimation results between the two periods, especially, the close screening review by the regional Credit Guarantee Foundation was useful to decrease default probability during the normal period, but they were not useful during the crisis period. There was no evidence of moral hazard problem of borrowers, but there were evidences of adverse selection and moral hazard problems of financial institutions and regional Credit Guarantee Foundations.