COVID-19 Time Bomb 'SMEs and Small Business Owners' Loans... Increased by 173 Trillion Won in 2 Years

Over 80 Trillion Won Increase Annually Since COVID-19
Double the Growth Compared to Pre-COVID Period
Risk of Becoming Non-Performing Loans Once Repayments Begin

[Asia Economy Reporter Shim Nayoung] Since the COVID-19 pandemic, the loan volume for small and medium-sized enterprises (SMEs), including self-employed individuals, has increased by 173.4729 trillion KRW over two years (January 2020 to January 2022).

On the 26th, the Bank of Korea examined the data based on domestic deposit banks and found that SME loan volume increased by more than 80 trillion KRW annually after COVID-19. Compared to the three-year average before the pandemic (42.1 trillion KRW), the increase is about double. A financial sector official said, "SMEs and small business owners borrowed operating funds, and policy financial institutions expanded loan support, resulting in a high growth rate."

The increase in loans for SMEs was much steeper than for large corporations. In the first year of the pandemic (January 2020 to January 2021), the increase in SME loans (8.9753 trillion KRW) was about four times that of large corporations (1.97238 trillion KRW), but in the second year (January 2021 to January 2022), the gap widened to about ten times (SMEs 8.43976 trillion KRW, large corporations 0.82243 trillion KRW). While major large corporations recovered their business performance through exports, SMEs and small business owners without an escape route continued to survive on debt.

Analysis suggests that the increase in SME loans will continue this year. Presidential candidates from both ruling and opposition parties have pledged tens of trillions of won in support for small business owners immediately upon election. Lee Si-eun, a researcher at KDB Future Strategy Institute, said, "With the government's COVID-19 response and new liquidity supply programs from the financial sector, SME loans will increase," adding, "SMEs in vulnerable industries with deteriorating debt repayment capacity are expected to maintain a high level of credit risk."

Signs that the surge in SME loans (including self-employed) since the COVID-19 pandemic could become a time bomb are emerging everywhere. Although repayment delinquency rates and business closure rates have decreased as companies endured by borrowing over two years, once loan repayments begin, they could turn into non-performing loans. According to the Financial Services Commission, among the 132 trillion KRW in SME loan balances facing the end of loan maturity extensions and repayment deferrals in March, about 10% annually (approximately 500 billion KRW) of the group that postponed interest payments classified as 'high-risk' (principal balance of 5 trillion KRW) is being processed as defaults.

‘Zombie companies’ that have been unable to pay even bank loan interest for three years are concentrated among SMEs. According to the Bank of Korea, as of the end of 2020, the first year of the pandemic, 16.2% of domestic SMEs were classified as ‘zombie companies.’ By industry, the accommodation and food service sector, which was 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, "Without policy funds injected into SMEs, many companies would have closed down."

According to a survey by the Korea Institute for Industrial Economics and Trade, the proportion of manufacturing listed companies classified as zombie companies 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 said, "If interest rates rise in the future, some of the companies showing signs of insolvency that 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 but continuously running water, causing overflow ? that’s exactly the current situation with SME and self-employed loans," the loan growth rate is expected to accelerate further after the presidential election on the 9th of next month. Candidate Lee Jae-myung proposed "a second supplementary budget immediately after election and debt forgiveness due to COVID-19," while candidate Yoon Seok-yeol is pushing a pledge to "support self-employed with 50 trillion KRW." The financial sector anticipates, "The next step will likely be extending the March maturity extension and repayment deferral and pressuring for more loans to self-employed individuals."

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