Banks with record profits raised interest rates for SMEs and households to earn money

35.6% of Small Businesses Receive Loans Below 3% Interest
Nearly Half Decrease from 66.7% a Year Ago
Large Corporations Show Increase to 72.5%
Bank Sector: "Difference Due to Default Risk"

[Asia Economy Reporter Song Seung-seop] Major commercial banks have been found to have earned significant profits by applying high interest rates to loans for small and medium-sized enterprises (SMEs) and households. Although the base interest rate rose equally, an opposite phenomenon was observed where large corporations actually saw an increase in low-interest borrowers.

According to the Bank of Korea on the 10th, among SME loan users in December last year, 35.6% of SMEs borrowed at an interest rate below 3% per annum. This is a 3.3 percentage point decrease from 38.9% a month earlier. Compared to a year ago when it was 66.7%, the number of SMEs borrowing at below 3% interest nearly halved.

The proportion of low-interest household borrowers declined even more sharply. Until the third quarter (September) of last year, borrowers with loans below 3% per annum accounted for 54.1%, more than half. However, in just three months, this dropped by 29.1 percentage points to 25.0%. Compared to the previous year (81.2%), it shrank to about one-third.

The share of loans with interest rates in the high range of 4-6% per annum in the primary financial sector continued to increase. The proportion of SMEs borrowing within this interest rate range was 15.6% at the end of last year, up 2.1 percentage points from 13.5% the previous month. In December 2020, it was 8.9%, not even reaching 10%. Household loans also increased by 1.1 percentage points from 12.8% to 13.9% in one month.

On the other hand, large corporations borrowed money at cheaper interest rates. In December, 72.5% of all large corporate loan borrowers borrowed funds at low interest rates below 3% per annum. This increased by 7.5 percentage points from 65.5% the previous month. Although it decreased by about 6 percentage points compared to 78.5% a year ago, this decline is minimal compared to SMEs (31.1 percentage points) or household loans (56.2 percentage points).

The proportion of large corporations borrowing at interest rates of 4-6% per annum was 5.4%. It was 6.1% a month earlier and 6.0% a year ago.

Even with the same base rate hike, loan interest rates hit SMEs and households hardest

Although the impact of the base interest rate hike was applied equally to all economic agents, the actual shock of loan interest rate increases was applied differently. The trend of rising loan interest rates began when the base rate rose from 0.5% to 0.75% in August last year. Since then, the base rate has increased twice more until last month, reaching the pre-COVID-19 level of 1.25%. The Bank of Korea still considers the rates not high and forecasts that the rate may rise two to three more times this year.

Government and financial authorities’ demands to manage the increase and soundness of household loans also had an impact. Financial authorities recommended managing the total household loan growth rate at 5-6% last year. As the end date of the financial grace policy provided to small business owners approaches in March, measures to address concerns about non-performing loans, such as additional provisioning, have been consistently requested.

Banks say they must consider ‘default risk’ in addition to the base interest rate hike. A financial sector official explained, "When lending to companies, we evaluate not only the base interest rate but also the company’s creditworthiness, risk, financial structure, and growth potential." He added, "For SMEs and households, risk management costs beyond the base interest rate were higher." He emphasized, "It is not that excessively high interest rates were charged to SMEs or special favors given to large corporations; it varies according to market logic."

There is also an analysis that competition in the large corporate loan market intensified as the growth path of retail banking was blocked by government and financial authorities’ household loan regulations. Another financial sector official said, "The retail sector was blocked, and banks needed to grow, so a management strategy was established to focus on corporate loans." He added, "Corporate loan business is difficult to recover once damaged, so even if interest rates are applied low, banks need to attract many large corporate customers."

Meanwhile, major commercial banks recorded record-breaking profits last year. KB Kookmin Bank’s net profit last year was 2.5908 trillion won, a 12.7% (292.6 billion won) increase from 2.2982 trillion won the previous year. Shinhan Bank and Woori Bank also achieved net profits of 2.4944 trillion won and 2.3755 trillion won, respectively.

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