Social Distancing and Interest Rate Hikes... Small Business Owners 'Adding Insult to Injury'

Bank of Korea "Low interest rates not fixed forever"
Indicates increase in 0.25% ultra-low interest policy loans for small business owners
Initially launched at 1.25%
Interest burden rises when rates increase

[Asia Economy Reporter Jang Sehee] The Bank of Korea is expected to raise the interest rates on loan products for small business owners and small and medium-sized enterprises (SMEs) supplied through commercial banks for the first time. With forecasts suggesting that the Monetary Policy Committee will raise the base interest rate at least three times this year, including on the 14th, it has become inevitable that the ultra-low interest policy loan products for small business owners will also see interest rate hikes. The related loan interest rates, currently in the 2% range, are expected to exceed 3%, deepening the struggles of small business owners who are already having a hard time due to social distancing measures.

A Bank of Korea official said on the 3rd, "The interest rates on policy loan products are not fixed at low rates forever," adding, "They must be considered alongside the base interest rate hikes." This means that as the Bank of Korea is likely to raise the base interest rate this year, there is a significant possibility that the related loan interest rates will also increase.

The policy loan product referred to by the official is the Financial Intermediation Support Loan (Geumjungdae) for small business owners and SMEs. The Bank of Korea supplies funds to commercial banks at an ultra-low annual interest rate of 0.25% to provide loans to these groups at low rates. Banks then add ▲labor costs ▲legal costs (insurance premiums) ▲risk management costs to determine the final interest rate. In this process, the loan interest rate varies depending on individual credit ratings. Considering that banks add a margin (2~2.5%) to the Geumjungdae procurement rate when calculating the loan handling interest rate, the final interest rate is expected to reach 3~3.5%. Currently, the loan interest rates for small business support under Geumjungdae range from 2.37% to 2.85%, and for companies affected by COVID-19, from 2.62% to 3.34%.

Since launching the Geumjungdae product in 2013, the Bank of Korea has continuously lowered the interest rates. During the period when the base interest rate was in the 1% range, from 2015 until just before COVID-19, the Geumjungdae interest rate was operated at around 0.5~0.75%. After the COVID-19 outbreak early last year, the Geumjungdae interest rate was lowered to an all-time low of 0.25% and has been maintained at that level since.

The Bank of Korea mentioned the possibility of raising the Geumjungdae interest rate because the loan volume has grown to an unmanageable level. Under ultra-low interest conditions, the amount of Geumjungdae loans handled by commercial banks increased from 30.3 trillion won in June last year to 36.2 trillion won in October, rising by about 6 trillion won in four months. Given the tightening of financial conditions due to inflation and other factors, loans to small business owners and SMEs cannot be exempted.

This stance from the Bank of Korea was also detected during last year's National Assembly audit. The Bank of Korea effectively rejected political demands for further reductions in the Geumjungdae interest rate, citing a decline in policy effectiveness. According to materials submitted by the Bank of Korea to the office of Assemblyman Woo Won-sik of the National Assembly's Planning and Finance Committee, "Individual banks set loan interest rates considering each borrower's credit conditions, such as collateral and guarantee status, credit rating, and income." This indicates there is no room to lower the interest rate further. Since the highest Geumjungdae interest rate was 1.25% at launch, there is ample room for future increases.

As the likelihood of interest rate hikes grows, voices advocating that support for vulnerable groups should be provided through fiscal rather than monetary policy are gaining strength. Professor Jeong Se-eun of the Department of Economics at Chungnam National University said, "Finance is more about individual repayment ability than welfare, so there are limits to support," adding, "For self-employed people who continue to suffer damage, direct support such as rent reductions is desirable."

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