Companies Relying on Bank Loans Amid Low Interest Rates... Risk of Insolvency Due to Delayed Economic Recovery (Comprehensive)

Companies' Profits Declined but Actively Increased Bank Loans Using Low-Interest Environment
Possibility of Brake on Corporate Fundraising Next Year
'Donmakgyeonghwa' Phenomenon Intensifies

[Asia Economy Reporter Park Sun-mi] As concerns grow over the prolonged economic downturn caused by the novel coronavirus disease (COVID-19) and increased uncertainty, corporate operating profits have sharply declined, while the surge in corporate loans is now turning into a boomerang, raising alarms that a flood of corporate defaults could occur next year.

According to the report titled "Review of Market Fund Flows and Financial Market Outlook" and "Will the COVID-19-Induced Fund Concentration Phenomenon Ease?" released on the 24th by Hana Financial Management Research Institute, the average monthly loan amounts for small and medium-sized corporations and individual business owners in the banking sector, based on cumulative data from January to October this year, reached 4 trillion KRW and 4.2 trillion KRW respectively. This represents an increase of 3.2 trillion KRW and 2.1 trillion KRW compared to 1.8 trillion KRW and 2.1 trillion KRW in the previous year. Loans to large corporations also surged significantly during the same period, reaching 2.5 trillion KRW, up 2.7 trillion KRW from -200 billion KRW in the same period last year.

Corporate loans in the banking sector increased from 857.7 trillion KRW in 2018 to 906.5 trillion KRW last year, a rise of 48.8 trillion KRW in one year. This year, due to the impact of COVID-19, demand surged sharply. As of June, the amount recorded was 987.8 trillion KRW, an increase of 81.3 trillion KRW in just six months.

The problem lies in the fact that both large corporations and small and medium-sized corporations actively increased bank loans by taking advantage of the low-interest-rate environment, despite declining corporate profits.

Kim Wan-joong, a research fellow at Hana Financial Research Institute, stated, "Due to the government's expansion of policy financing, loan maturity extensions, interest payment deferrals, efforts by the financial sector to expand corporate loans, and improvements in the corporate bond market environment, a favorable environment for fundraising has continued. However, the proportion of marginal companies is expected to exceed 20% this year due to the impact of COVID-19, and the recovery of small and medium-sized enterprises and small business owners, who have received concentrated financial support, is uncertain due to the resurgence of COVID-19, increasing the risk of related defaults."

He analyzed that the possibility of a brake being applied to corporate fundraising next year is an even bigger problem. Despite the expansion of liquidity supply so far, investment contraction and consumption slowdown are intertwined, limiting liquidity supply to the real sector. The opportunity cost of holding money has decreased due to low interest rates, and the velocity of money circulation continues to decline, intensifying the phenomenon of "money stagnation."

Possibility of Corporate Loan Defaults
Need to Pay Attention Despite Deterioration of Financial Sector Soundness Indicators

Research fellow Kim predicted, "Corporate fundraising will slow down due to limited improvement in operating profits, potential slowdown in government policy fund supply, restricted investment demand due to economic uncertainty, and preemptive securing of reserve funds."

He added, "If the recovery of the real economy is delayed due to the resurgence of COVID-19, there is a possibility that the rapidly increasing private credit, centered on corporate loans that surged this year, could face higher default risks. It is also necessary to be cautious about the possibility of a sharp deterioration in the financial sector's soundness indicators if financial support measures such as loan maturity extensions and interest payment deferrals, which have been extended until March next year, come to an end."

Meanwhile, the surplus household funds next year are also expected to decrease compared to this year due to housing finance and loan regulations. According to the report, the average monthly household loan amount this year was 8 trillion KRW, an increase of 2.9 trillion KRW compared to 5.1 trillion KRW last year. Although household loans increased significantly this year, it is said that borrowing could become more difficult next year due to pressure from financial authorities and tightening by commercial banks.

On the 24th, when major commercial banks have effectively closed the doors to unsecured loans until the end of the year, a customer visiting a bank loan counter in Seoul is receiving consultation regarding loans. Photo by Jinhyung Kang aymsdream@

In fact, Shinhan Bank has stopped accepting credit loan applications at branches following mobile channels, and Hana Bank has also decided to temporarily suspend mobile credit loan services. Kookmin Bank has already stopped new household credit loans exceeding 20 million KRW since the 22nd. Yoon Seok-heon, Governor of the Financial Supervisory Service, expressed concerns about the speed of debt increase and announced that the household debt total management system ordered to banks until the end of the year will be maintained for the time being.

Research fellow Kim said, "Due to government housing finance regulations and tax strengthening, household loan suppression measures, and a decrease in housing market transactions centered in the metropolitan area, household loan demand is decreasing, and the stock market, which has seen large capital inflows so far, is also expected to experience a slowdown in capital inflows."

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