"If No Collateral, Hard to Borrow Money" Banks Reduce Credit and Increase Collateral for SME Loans

Chairman Yoon Kwan-seok of the National Assembly's Political Affairs Committee Obtains and Analyzes Data on SME Bank Loans Over the Past 5 Years via FSC
Proportion of Unsecured and Unguaranteed Loans to SMEs Continues to Decline Amid Worsening Economy
Corporate Credit Loans Increased Due to COVID-19 Financial Struggles, but SME Loans Still Decreasing

[Asia Economy Reporter Kim Min-young] It has been revealed that commercial banks are reducing the proportion of unsecured and non-guaranteed credit loans to small and medium-sized enterprises (SMEs). Instead, the proportion of secured loans has increased, indicating that the practice of not being able to borrow money without collateral is becoming more entrenched.

On the 12th, Yoon Kwan-seok, chairman of the National Assembly's Political Affairs Committee (Incheon Namdong-eul), analyzed the status of corporate loans by domestic commercial banks since 2015 through the Financial Supervisory Service. The proportion of unsecured and non-guaranteed credit loans to SMEs, which was in the 30% range in 2015, dropped to the 20% range as of the end of June 2020.

On the other hand, the proportion of secured loans rose from the 50% range to the 60% range, confirming that the collateral-based lending practice, which had been criticized as "taking away the umbrella when it rains," is becoming more severe.

Due to factors such as strong soundness regulations on banks' risk management and a relative increase in available funds (such as internal reserves), the proportion of credit loans to large corporations also decreased during the same period. However, even though the proportion of credit loans to large corporations decreased, it remained in the mid-60% range, creating a stark contrast with SMEs, whose proportion is now only in the mid-20% range, considering the difference in creditworthiness between companies.

In particular, this year, as the demand for funds from companies increased due to the novel coronavirus disease (COVID-19), the proportion of credit loans to large corporations increased by more than 2% from 64.4% last year to 66.5% as of the end of June this year.

However, SMEs, which are experiencing even more severe financial pressure, saw their credit loan proportion decrease from 25.9% to 25.2% during the same period. Instead, the annual decrease rate, which had been 1.5-2%, slowed to 0.7%, and thanks to the expansion of government policy guarantees, the proportion of guaranteed loans increased by nearly 2%. The proportion of secured loans also decreased by 1.1%, from 61.4% to 60.3% during the same period.

Notably, even the proportion of credit loans among SME loans at the Industrial Bank of Korea, a policy financial institution supporting SMEs, has decreased by 1-3% annually from 29.7% in 2015 to 18.9% as of the end of June this year, falling below the overall commercial bank proportion (25.2%).

To improve these banking loan practices, since 2014, financial authorities have encouraged technology finance and provided incentives to excellent banks, making institutional efforts. However, according to the Financial Services Commission, even technology finance, including pure unsecured and non-guaranteed technology credit loans and government-backed technology guarantee loans, has been decreasing in proportion every year since 2016. In contrast, the proportion of secured technology loans has been increasing annually.

Chairman Yoon stated, "Considering the prolonged phase of structural low growth and polarization of corporate creditworthiness, banks that must maintain a certain level of soundness may find it inevitable to set collateral rights or obtain policy guarantees to meet the increasing corporate demand for funds." He also pointed out, "For newly established companies with weak collateral power, it is necessary to diversify SME funding methods more toward direct financing, such as venture capital (VC) investment."

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