[2020 National Audit] Higher Bank Barriers for SMEs with '80% Collateral - 20% Credit'

Yoon Kwan-seok, Chairman of the Political Affairs Committee, Analyzes SME Bank Loan Data Over the Past 5 Years
Amid Economic Downturn, Unsecured and Unguaranteed Loans to SMEs Further Decline
Technology Financing for Excellent SMEs with Weak Collateral and Financial Strength Also Decreases
Corporate Credit Loans Increase Amid COVID-19 Financial Struggles, While SME Loans Continue to Decline

[Asia Economy Reporter Jo Gang-wook] Concerns have been raised that banks are raising the bar for loans to small and medium-sized enterprises (SMEs). This is because commercial banks have been gradually reducing the proportion of unsecured and non-guaranteed credit loans to SMEs while increasing the proportion of secured loans.

According to data obtained by Yoon Kwan-seok, chairman of the National Assembly’s Political Affairs Committee and a member of the Democratic Party of Korea, through the Financial Supervisory Service on the status of corporate loans by domestic commercial banks since 2015, the proportion of unsecured and non-guaranteed credit loans to SMEs has continuously decreased every year. The share, which was in the 30% range in 2015, dropped to the 20% range as of the end of June 2020. In contrast, the proportion of secured loans rose from the 50% range to the 60% range, indicating that the practice of collateral-based lending is becoming increasingly entrenched.

Due to factors such as banks’ risk management under strong soundness regulations 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 declined, it remained in the mid-60% range, which is a stark contrast to SMEs whose proportion is now only in the mid-20% range, considering the difference in creditworthiness between companies. Notably, in 2020, as corporate demand for funds increased due to COVID-19, the proportion of credit loans to large corporations rose by more than 2% from 64.4% in 2019 to 66.5% as of the end of June 2020.

However, SMEs, which are under even more severe financial pressure, did not escape the downward trend in the proportion of credit loans this year either (from 25.9% to 25.2%). 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% (from 12.6% to 14.5%). Consequently, the proportion of secured loans slightly decreased by 1.1%, from 61.4% at the end of 2019 to 60.3% as of the end of June 2020.

Looking at the proportion of credit loans among SME loans by commercial banks as of the end of June 2020, Woori Bank had the highest at 39.4%, while Kookmin Bank had the lowest at 17.3%. Since 2015, the largest decrease was at Hana Bank, dropping 14.1% from 32.8% to 18.7%. Particularly, even the Industrial Bank of Korea, a policy financial institution supporting SMEs, saw its proportion of credit loans among SME loans decline by 1?3% annually from 29.7% in 2015 to 18.9% as of the end of June 2020, falling below the overall commercial bank average of 25.2%.

To improve these banking loan practices, financial authorities have made institutional efforts since 2014, such as encouraging technology finance and providing incentives to excellent banks. However, according to the Financial Services Commission, the proportion of pure technology credit loans without collateral or guarantees, including government-backed technology guarantee loans, has been decreasing every year since 2016. In contrast, the proportion of secured technology loans has been increasing annually.

Yoon said, "Considering the prolonged phase of structural low growth and polarization of corporate creditworthiness, banks, which must maintain a certain level of soundness, may find it inevitable to require collateral or policy guarantees to meet the increasing corporate demand for funds." He added, "Nonetheless, although efforts are being emphasized to lower the banking threshold for SMEs by diversifying corporate finance methods and advancing corporate evaluation and credit screening using intangible assets such as technology and intellectual property rights, the reality falls short of expectations," expressing his regret.

He also stressed, "For startups with weak collateral, it is necessary to diversify SME funding sources more toward direct financing such as venture capital investment, and financial authorities should make greater efforts to improve SME financial policies by making banks’ technology finance evaluations more realistic, strengthening substance over inflated figures."

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