Rising Bank Thresholds for SMEs...Collateral Loan Proportion Increased Further

Collateral Loan Ratio for SMEs and Individual Entrepreneurs at Four Major Banks Stands at 80-90% Level

[Asia Economy Reporters Sunmi Park, Hyojin Kim] As commercial banks increase loans to small and medium-sized enterprises (SMEs), it has been revealed that they have been raising the proportion of safe secured and guaranteed loans instead of unsecured and non-guaranteed credit loans. Critics point out that the collateral-based lending practice is deepening, ignoring the difficulties faced by SMEs and individual business owners (SOHO) due to the spread of COVID-19.

According to the banking sector on the 30th, loans to SMEs including SOHO by the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?amounted to approximately KRW 570.4 trillion as of the end of June, an increase of about KRW 44.1 trillion (8.4%) from KRW 526.3 trillion at the end of last year. The government and authorities’ orders to the banking sector to provide smooth funding support to SMEs amid the COVID-19 spread led to the growth in SME loans.

Notably, while banks significantly increased SME loans, they managed risks mainly through safe secured and guaranteed loans. The proportion of secured loans for SMEs and individual business owners at the four major commercial banks stands at around 80-90%. In particular, Shinhan, Hana, and Woori banks have shown a continuous upward trend in the proportion of secured loans for SMEs.

As of the end of June, Shinhan Bank’s secured loan ratio for SMEs was 78%, and for individual business owners, it was 85%. These figures rose by 1 percentage point from 77% and 84%, respectively, at the end of last year. Hana Bank’s secured loan ratios were 82.5% for SMEs and 85.5% for individual business owners, up from 82.1% and 84.9% at the end of last year. Woori Bank also recorded secured loan ratios of 87.6% for SMEs and 92.5% for individual business owners in the first half of the year, rising from 87.2% and 92.1% at the end of last year.

The majority of secured loans by commercial banks are backed by real estate and guarantee certificates. Even amid the COVID-19 crisis, the collateral-based lending practice targeting SMEs is deepening, meaning that the threshold for banks to lend to companies lacking collateral strength has become higher.

Loans Concentrated in Real Estate, Leasing, and Manufacturing

Given this situation, most SME loans are concentrated in sectors where providing collateral is easier, such as real estate, leasing, and manufacturing, making it difficult for sectors classified as vulnerable to COVID-19?such as wholesale and retail, restaurants, and lodging?to borrow money easily. According to the status of SME loans by industry for each bank, the proportion of real estate, leasing, and manufacturing approaches 60%, while wholesale, lodging, and restaurant industries account for only about 20%.

The outlook for the SME economy has worsened for three consecutive months due to the impact of the fourth wave of COVID-19. Especially with strengthened quarantine measures such as the implementation of Level 4 social distancing in the metropolitan area, lodging and restaurant industries are expected to be severely affected, raising concerns that funding difficulties for certain sectors due to collateral-based lending practices will continue.

According to a survey conducted by the Korea Federation of SMEs from August 15 to 22 targeting 3,150 domestic SMEs, the business outlook index for August was 73.6, down 5.3 points from the previous month. According to the Korea Federation of SMEs’ ‘Survey on SME Financial Use and Difficulties,’ SMEs cited insufficient loan limits (27%) and lack of real estate collateral (24.1%) as the top difficulties when raising funds through banks. Because of this, more than 30% of respondents consider improving the reliance on secured loans as a necessary financial support task for SMEs.

A representative from a commercial bank explained, "The number of cases that can be secured by collateral such as guarantee certificates has increased due to various COVID-19 support measures, and the value of assets such as real estate has risen, which has also increased the scale of secured loans. For self-employed individuals struggling due to COVID-19, many have taken out loans using personally owned apartments as collateral and used the funds for business capital."

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