[Unstoppable SME Loans] Rapid Increase in Secondary Financial Sector... Signs of Time Bombs Everywhere

Savings Banks' SME Loan Volume Rises 30.7%
Warnings on Soundness Including Default Risks

[Asia Economy Reporters Sim Nayoung, Song Seungseop, Song Hwajeong] Lee Young-eun, who runs a franchise pizza shop in Uiwang, Gyeonggi Province, opened her main bank app while sitting in the empty corner of her store on the morning of the 18th. She had stayed awake until dawn searching for ways to get a Hope Plus loan and applied for 10 million won. "Looking at the delivery performance, my husband and I worked 10 hours a day, selling 115 pizzas a month, which is less than 4 orders a day. The delivery market is saturated, and since opening, we have lost more than 8 million won over five months," Lee said.

Borrowers who postponed interest repayment eventually treated as default; distressed companies concentrated among SMEs

Signs that the surge in loans to small and medium-sized enterprises (SMEs), including self-employed businesses, since the COVID-19 pandemic could become a time bomb are emerging everywhere. Although borrowing to endure for two years lowered delinquency and closure rates, the moment loan repayments begin, these loans could turn into non-performing loans. According to the Financial Services Commission, among the 132 trillion won in SME loans with maturity extensions and repayment deferrals ending in March, about 10% annually (approximately 500 billion won) of the group that postponed interest payments (with a principal balance of 5 trillion won) is being treated as default.

Distressed companies that have been unable to pay even bank loan interest for three years are also concentrated among SMEs. According to the Bank of Korea, as of the end of 2020, the first year of the COVID-19 outbreak, 16.2% of domestic SMEs were classified as distressed companies. By industry, accommodation and food services, which were severely impacted by COVID-19, accounted for the highest proportion at 43.1%, up 4.7% from the previous year. Shipbuilding (23.6%), transportation (22.6%), automobile (17.8%), and aviation (16.7%) industries also showed high proportions. A commercial bank official said, "If policy funds had not been injected into SMEs, many companies would have gone out of business."

According to a survey by the Korea Institute for Industrial Economics and Trade, the proportion of listed manufacturing companies classified as distressed was 39.1% in the third quarter of last year, higher than during the global financial crisis in 2009 (30.4%). The number of companies with worsened conditions, posting negative operating profits, also increased significantly, reaching 26.1% in the second quarter of last year. The institute stated, "If interest rates rise in the future, some companies showing signs of distress, which have relied on low interest rates and special COVID-19 financing, may face greater difficulties."

As a senior official from the Ministry of Economy and Finance expressed concern, "It's like blocking the bathtub entrance and continuously running water, causing it to overflow; this is exactly the current situation with SME and self-employed loans," the loan growth is expected to accelerate after the presidential election on the 9th of next month. Candidate Lee Jae-myung has proposed "a second supplementary budget immediately after election and debt forgiveness due to COVID-19," while candidate Yoon Seok-youl is pushing a pledge to "support self-employed businesses with 50 trillion won." The financial sector anticipates that "the new government transition committee will likely block the end of maturity extensions and repayment deferrals in March and pressure for more loans to self-employed borrowers" as the next step.

The riskier secondary financial sector with weaker capital adequacy

Eun Sung-soo, Chairman of the Financial Services Commission, is giving opening remarks at the Savings Bank Industry CEO Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 16th. Photo by Kim Hyun-min kimhyun81@

A bigger problem is that SME loans have surged even in the secondary financial sector, which has weaker capital adequacy than banks. This is due to secondary financial institutions, whose household loan business has been restricted by total volume regulations, simultaneously strengthening their corporate loan sectors. There are concerns about soundness management because many borrowers in the secondary financial sector are low-credit, financially vulnerable small businesses.

According to the Bank of Korea, as of the end of November last year, savings banks' SME loan volume reached 57.2705 trillion won, an increase of 13.464 trillion won (30.7%) compared to 43.8065 trillion won at the end of the previous year. Despite December data not yet being available, this is the steepest increase since the Bank of Korea began publishing related statistics in January 2013. Considering the increasing difficulty in household loan operations, it is highly likely that SME loan volumes expanded in December as well.

This year, with each sector receiving strengthened total volume regulation targets, the trend of increasing SME loans in the secondary financial sector is expected to continue. There are warnings that soundness could be shaken, including the possibility of a chain default crisis.

The government says it has prepared countermeasures

The government has prepared proactive debt adjustment support measures in anticipation of rising SME loans and defaults following the end of COVID-19 financial support. According to the Financial Services Commission's improvement plan announced in September last year, which extended maturity extensions and principal and interest repayment deferrals for SMEs and small business owners until March, borrowers facing repayment difficulties can receive support such as interest reductions and long-term installment repayments through bank self-support programs and pre-workout systems.

Additionally, the Credit Recovery Committee's debt adjustment programs are being expanded. Previously targeting multiple debtors, support will now also be available for single debtors, and restrictions on debt adjustments for self-employed COVID-19 victims will be temporarily eased, with interest rate reductions expanded. Furthermore, the Korea Asset Management Corporation (KAMCO) will acquire non-performing loans from small and medium-sized corporations. The targets are loans classified as substandard or below and loans overdue for more than six months that financial institutions need to sell. Through measures such as postponing collateral execution, installment repayments, and debt reductions, the plan aims to restore normal business operations. However, if the scale of non-performing loans increases significantly, the government may need to prepare additional measures or substantially increase financial support.

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