Companies Struggling... Bank Delinquency and Bill Default Rates at Lowest in 20 Years

Impact of COVID-19 Financial Support and Record-Low Interest Rates... Concerns Over Deterioration After Normalization

[Asia Economy Reporter Yu Je-hoon] Despite the COVID-19 pandemic, the corporate bank loan delinquency rate and bill default rate have recently remained at their lowest levels in 20 years. This is the result of a combination of historically low benchmark interest rates and government COVID-19 financial support measures. However, experts are concerned that since the fundamental strength of companies has not improved, a chain reaction of corporate insolvencies could occur once the monetary policies of the Bank of Korea and other countries normalize and COVID-19 financial support ends.

According to the Bank of Korea's Economic Statistics System on the 31st, last year's bill default rate (by amount, excluding electronic payments) was recorded at 0.07%. Although this is a 0.01 percentage point increase compared to 2020 (0.06%), which was the lowest in about 30 years, it is still managed at a significantly lower level compared to the early to mid-2010s when it ranged around 0.11?0.19%.

The corporate bank loan delinquency rate is also at 0.3%, the lowest level in the past 20 years. The delinquency rate surged during the foreign exchange crisis and the global financial crisis but has steadily declined and stabilized since the late 2010s.

The primary reason for the historically low bill default and loan delinquency rates despite the impact of COVID-19 is the historically low benchmark interest rate. The Bank of Korea lowered the rate to 0.50% in May 2020, right after the COVID-19 pandemic began, and has raised it three times since last year, with the current benchmark interest rate at 1.25%.

Another main cause is that financial authorities have extended COVID-19 financial support for small and medium-sized enterprises (SMEs) and small business owners four times. According to the Financial Services Commission, as of the end of January, the amount of financial sector loans benefiting from maturity extensions and repayment deferrals reached 133.4 trillion won by balance and about 704,000 cases by number. Additionally, various low-interest policy funds were supplied to the market to support companies and stimulate the economy due to COVID-19.

A Bank of Korea official explained regarding the historically low bill default rate, "Since March 2020, government financial support policies have allowed many SMEs and small business owners to have relatively eased situations through repayment deferrals and maturity extensions," adding, "This is similar to the context in which bank delinquency rates are managed at historically low levels."

However, authorities and experts do not see this situation as sustainable. As of the end of last year, about 36% of companies had an interest coverage ratio below 1, and for SMEs, this figure was about 50%, indicating that their fundamental strength remains weak. Moreover, this year, with the ongoing interest rate hike trend and the scheduled end of COVID-19 financial support, concerns are rising.

An official from the Financial Supervisory Service stated, "External and internal adverse factors such as COVID-19 and the Ukraine war persist, and especially as countries attempt to normalize monetary policies, asset price adjustments are likely to sequentially worsen borrowers' repayment abilities," adding, "Since such a perfect storm could occur, we are recommending banks to set aside additional provisions under a conservative outlook and urging thorough preparation."

Joo Won, head of the Economic Research Office at Hyundai Research Institute, said, "The end of COVID-19 financial support itself is a problem, but interest rate hikes and rising raw material prices due to the war could worsen corporate liquidity," and added, "To ensure a soft landing for small and micro enterprises, it would be worth considering a phased reduction of COVID-19 financial support in the second half of the year, similar to tapering."

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