"Even Amid Rising Interest Rates... SME and Self-Employed Loans Lead Solo Charge"

Increase of 10 Trillion KRW in SME Loans by 5 Major Banks in Two Months
Contrasting with Shrinking Household Loans

SME Loan Interest Rates 0.4%p Lower than Household Loans
Widest Gap in Over 20 Years

Higher Risk of Non-Performing Loans Due to Debt Reliance

The streets of Myeongdong were colder. It was not just because of the subzero temperatures. Due to the resurgence of COVID-19, the decrease in tourists, and the strengthening of social distancing measures, numerous rental inquiries, temporary closure notices, and business termination announcements were posted throughout the shops in this area. On the 7th, I captured images of about 100 closed stores on the streets of Myeongdong. Photo by Moon Honam munonam@

[Asia Economy Reporter Sim Nayoung] Despite rising interest rates, loans to small and medium-sized enterprises (SMEs) and self-employed individuals continue to increase. As business operations became difficult due to the COVID-19 pandemic, demand for operating funds persisted, coupled with the fact that interest rates on these loans rose much more slowly than those on household loans. After financial authorities imposed regulations to curb household loans, banks lowered loan interest rates for SMEs and the self-employed, intensifying competition. While household loans have declined for two consecutive months, showing signs of stabilization, a balloon effect has appeared on the side where debt repayment ability is weakening.

According to the five major commercial banks on the 4th, the total outstanding loans to SMEs (including the self-employed) in February amounted to 563.9614 trillion won. This is an increase of 3.2227 trillion won compared to January (559.7387 trillion won). In January, the amount had increased by 6.2602 trillion won compared to December of last year. In just two months, the amount jumped by about 10 trillion won. Compared to household loans shrinking by about 3 trillion won during the same period, this is a solo surge.

A Financial Services Commission official stated, "Household loan demand has significantly decreased to the point where loan limit regulations are almost meaningless," adding, "This is because interest rates have risen sharply, housing prices have fallen leading to reduced real estate transactions, and the stock market has also been sluggish." The situation is quite different for SMEs and the self-employed. A Bank of Korea official explained, "Commercial banks are encouraging loans to SMEs and the self-employed at relatively low interest rates, and special banks like the Korea Development Bank are also providing low-interest loans according to government policies."

According to the weighted average interest rate data for deposit banks surveyed by the Bank of Korea, the interest rate on new SME loans in January was 3.52%. This was 0.39 percentage points lower than the household loan rate of 3.91%. It is the first time in about 20 years since May 2003 (0.4 percentage points) that SME loan interest rates have been lower than household loan rates. After the 1997 foreign exchange crisis, during the high-interest rate period, SME loan interest rates were lower than household loan rates for a while, but from 2004 onwards, the trend reversed and SME rates remained higher.

A financial industry official said, "After the foreign exchange crisis, as insolvent companies were completely liquidated, companies actually surpassed households in terms of soundness for a while, which is why SME loan interest rates were lower," adding, "The reason SME loan interest rates became higher than household rates later is that household loans were mostly mortgage loans with low default risk or loans given to people with good credit." The unusual phenomenon of SME loan interest rates being cheaper than household loans is due to financial authorities tightening the reins on household loans.

The problem is that loans to SMEs and small business owners who are surviving on debt have a high probability of becoming non-performing loans. On the 3rd, the government decided to extend the maturity extension and repayment deferral measures for small business loans affected by the COVID-19 crisis for another six months. Although the Financial Services Commission and banks expressed concerns, the decision was made considering political pressure and the difficult circumstances of small business owners. The financial sector is also worried, saying, "The delinquency rate of domestic banks was 0.21% (as of December last year), the lowest ever, but this is an optical illusion caused by borrowers enduring through debt."

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