'Corona Shock' Drives SME Loans Up by 8.5 Trillion KRW in April... Banks on High Alert for Risk Management

Increase Financial Support Amid COVID-19
Largest Growth Since September 2015
Bank Balances Reach 463 Trillion Won

[Asia Economy Reporter Kwon Haeyoung] Last month, loans to small and medium-sized enterprises (SMEs) and individual business owners at major banks increased by approximately 8.5 trillion KRW, marking the largest increase on record. This is attributed to banks expanding financial support as funding difficulties for small corporations and small business owners worsened due to business disruptions caused by the spread of COVID-19. However, increasing SME loans, which carry high risks during an economic downturn, has raised red flags regarding banks' risk management.

According to the financial sector on the 7th, the outstanding balance of SME loans (including individual business owner loans) at KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Banks reached 463.9291 trillion KRW last month, up 8.4379 trillion KRW from the end of the previous month (455.4912 trillion KRW). This increase is the largest since related statistics have been available, starting from September 2015.

Among these, the outstanding balance of individual business owner loans rose by 5.1219 trillion KRW to 247.7768 trillion KRW compared to the end of March. The increased funding demand from small business owners drove the expansion of SME loans.

The sharp rise in SME loans last month is analyzed to be due to the rapid deterioration of business conditions for small business owners and SMEs as consumption declined amid COVID-19. The government ordered the expansion of financial support for SMEs and small business owners facing liquidity shortages, including 3.5 trillion KRW in interest subsidy loans from commercial banks, prompting banks to actively increase related loans.

The upward trend in SME loans is expected to continue steadily. Although the spread of COVID-19 is slowing, the economic shock persists, and it will take time for consumer sentiment to recover to previous levels, meaning small enterprises and small business owners are expected to face difficulties for a considerable period.

Commercial banks are currently discussing detailed plans with the government to launch the second phase of a 10 trillion KRW funding support program for small business owners affected by COVID-19. Previously, the government also eased banks' soundness regulations, such as the Basel III capital adequacy ratio (BIS ratio), liquidity coverage ratio (LCR), and loan-to-deposit ratio (LDR), to encourage expanded financial support.

While banks agree on the necessity of expanding funding to the real economy, they are closely monitoring the rapidly increasing SME loans for potential future rises in non-performing loans.

In fact, the delinquency rate on SME loans is also on the rise. According to the Financial Supervisory Service, the corporate loan delinquency rate in February, when COVID-19 began in earnest, was 0.54%, up 0.04 percentage points from the end of the previous month (0.51%). The SME loan delinquency rate increased by 0.04 percentage points to 0.58%. Among these, the delinquency rate for individual business owner loans was 0.35%, and for small corporations, it was 0.77%, rising 0.02 and 0.07 percentage points respectively during the same period.

A financial sector official said, "It is difficult to gauge how severe and prolonged the economic shock caused by COVID-19 will be. While active funding is necessary for companies and small business owners facing temporary liquidity shortages, if the situation prolongs, the risk of loan defaults will increase, so banks may adopt more conservative credit management in the future."

Meanwhile, the outstanding balance of large corporate loans also increased by 5.8052 trillion KRW to 88.5074 trillion KRW last month compared to the end of the previous month (82.7022 trillion KRW). The total increase in corporate loans, combining large and small-medium enterprises, in April was 14.2432 trillion KRW, the largest ever recorded.

This content was produced with the assistance of AI translation services.