South Korea’s watchdog said Thursday that it will delay loan repayments by subcontractors of big firms under debt rescheduling for nearly four months starting this month in a bid to help the small firms avoid cash shortages.

The Financial Supervisory Service said it will have creditor banks defer debt repayments by a subcontractor for up to 130 days if its prime contractor company is under a restructuring process. The measure is set to take effect from May 20.

“Prime contractors’ debt rescheduling puts an enormous amount of pressure on subcontractors, which is why we think it is necessary to lift such burdens,” Lee Gi-youn, an FSS assistant deputy governor, told reporters.

Debts subject to deferment include those extended by banks upon the subcontractor’s accounts receivable from its hiring company as collateral, the FSS said. The delay, however, only applies to the principal, and the subcontractor must keep paying the interest, it added.

The regulator’s move came as a major builder and a shipbuilding conglomerate here, hit by cash crunch, have been put under a debt restructuring program since March and April. That immediately strained the cash flow of 606 subcontractors of Ssangyong Engineering & Construction Co. and 148 hired smaller firms of STX Offshore & Shipbuilding Co.

The combined debts extended upon their accounts receivable currently stand at 204.8 billion won ($186.2 million), according to the FSS.

The FSS expects the deferment on subcontractor’s debt repayment will prevent subcontractors from joining their cash-strapped prime contractors and resulting in a chain of corporate defaults.

As of end-February, the amount of accounts receivable held by South Korean companies stood at 125.2 trillion won, and banks have extended loans worth about 15 trillion won with the accounts as collateral, according to FSS data. (Yonhap News)