Local banks rolled out 2 trillion won ($1.53 billion) in cash funding to relieve individuals and small businesses having trouble paying back loans or debts amid the prolonged economic downturn.

The measure comes in a month since the commercial banking sector and the financial authorities put their heads together to find means to reduce the burden for small companies and share the banks' profit gained from excessive interest rate.

The biggest part of the new plan is the 1.6 trillion won interest cash-back rewards scheme.

Some 1.87 million self-employed individuals and small merchants with a business loan as of Wednesday will have up to 3 million won returned in cash, with the refund applied to payments for interest rates exceeding 4 percent for a loan under 200 million won. Real estate lessors are excluded from the benefit.

An additional package of 400 billion won will be financed voluntarily by banks to support financially vulnerable individuals through other means than interest cash-back payments, such as compensation of utility bills and rents.

The regulators said there will also be a "plus alpha" on top of the 2 trillion won, with the government-run Korea Development Bank and the Export-Import Bank providing extra funding through policy financing programs.

According to the Financial Services Commission, this is the biggest-ever support package from the commercial banking sector made for the public’s livelihood.

Last month, 20 local banks formed a task force team with the financial authorities to voluntarily discuss means for mutual growth with smaller enterprises who were hit hardest by surging interest rates.

A “windfall tax” was proposed, which if enforced would require banks to share excessive profits gained through higher interest rates. The windfall tax was expected to be around 2 trillion won, approximately the 10 percent of the 18 participating commercial banks' combined net profit in 2022 of 18.93 trillion won.

Each of the institutions will provide 10 percent of their net profit this year, with the five major banks sourcing around 200-300 billion won each. The detailed amounts and rates may be adjusted depending on the conditions of each bank.

"The 2 trillion won support program is significant not only because of its vast size, but because it increases relief (from the support) by directly rewarding interest to borrowers burdened by high interest rates," said the Financial Supervisory Service's chief Lee Bok-hyun, urging a swift implementation from the institutions.

FSC Chairman Kim Joo-hyun also praised the latest effort as an outcome of "earnest participation" by the banking sector that sets a good precedent for banks voluntarily devising a joint support scheme.

For the implementation, each bank will establish plans for both the interest reward program and the voluntary financing program until January 2024, and start making interest cash-back payments starting February with the goal to complete within March.

The banking federation added that the interest rewards will be selected by the banks without a separate application process from the borrowers, and warned against any illegal acts to take advantage of the program.