SMEs with lower loan interest than households... Rising risk of insolvency

December Mid-term Loan Interest Rate 3.37%... 0.29%p Lower Than Household Rate
Loan Growth Rate Also Surpasses Households

Government's Policy Funds Distribution and Bank Corporate Sales Competition Are Causes
Signs of Insolvency Being Concealed
"Need to Distinguish Between Viable and Non-viable Companies"

[Asia Economy Reporter Sim Nayoung] The unusual phenomenon of small and medium-sized enterprise (SME) loan interest rates being lower than household loan rates continues. As it has become easier for SMEs and self-employed individuals to borrow money from banks, the loan growth rate has also significantly outpaced that of households. A notable feature is that the increase in SME (including sole proprietors) loans has been larger after the COVID-19 pandemic compared to before.

According to the Bank of Korea's Economic Statistics System on the 11th, as of December last year, the average interest rate on SME loans at deposit banks (based on new loans) was 3.37%, which was 0.29 percentage points lower than household loans (3.66%).

Typically, loan interest rates for SMEs are much higher than those for households. Household loans are usually secured by housing, which carries a lower risk of default, or lent to individuals with good credit. This unusual phenomenon began when financial authorities tightened restrictions on household loans starting last year.

In January last year, the loan interest rate for SMEs (2.90%) was still higher than that for households (2.83%). From March last year, the rates were equal at 2.88%, and from April to December, for nine consecutive months, SME rates remained below household rates. In October last year, the difference was as much as 0.32 percentage points (SME 3.14%, household 3.46%). A representative from a commercial bank explained, "Due to total volume regulations on household loans, interest rates had to be raised to reduce household lending. As household loan capacity was restricted, banks competed fiercely in corporate lending, which lowered corporate loan interest rates."

SME loan amounts have also been increasing rapidly. The outstanding SME loans at the five major commercial banks rose by 11.6%, from 501.139 trillion won at the end of January last year to 559.7386 trillion won at the end of January this year. In contrast, household loans increased by only 4.9% during the same period (from 674.3737 trillion won to 707.6895 trillion won). Looking at the annual SME loan growth rates, the increase after the COVID-19 pandemic (12.4% in 2020, 11.6% in 2021) was significantly higher than before (7.4% in 2019).

According to the Financial Supervisory Service’s ‘2021 Regular Credit Risk Assessment,’ 157 SMEs were classified as showing signs of insolvency last year, an increase of only four companies over the year. Before the COVID-19 pandemic in 2019, 201 companies showed signs of insolvency. This suggests that without government operating fund support, many companies would have had to close over the past two years.

Professor Andonghyun of Seoul National University’s Department of Economics said, "It is urgent to distinguish between companies that borrowed increased SME loan funds over the past two years for actual investment and those that are marginal companies. Otherwise, SME loan risks will inevitably increase when the COVID-19 crisis ends."

Juwon, head of the Economic Research Office at Hyundai Research Institute, said, "SMEs that borrowed through government policies received preferential treatment in loan conditions such as financial stability. While manufacturing companies in better situations likely used the funds for actual investment, service sectors probably used them as COVID-19 operating funds."

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