Mid-sized Companies Endure 'Triple Hardships'... "Personal Homes Also Used as Collateral Due to Base Rate Hikes"

A notice about loan interest rates posted on the exterior wall of a commercial bank in downtown Seoul.
[Image source=Yonhap News]

[Asia Economy Reporter Donghyun Choi] # Kim, CEO of a rebar and concrete construction company operating for over 20 years in Muan-gun, Jeollanam-do, recently received a call from a bank. It was a request for additional collateral due to the impact of the base interest rate hike on a secured loan contracted during a construction project last year. He found himself in a position where he had to provide not only corporate-owned real estate but also personally owned assets as collateral.

The Bank of Korea’s 'big step' of raising the base interest rate by 0.5 percentage points at once is causing distress among small and medium-sized enterprises (SMEs). On top of high inflation, high exchange rates, and high labor costs, the 'quadruple hardship' of high interest rates is pushing them to the brink of closure. Since SMEs are responsible for over 80% of all jobs in the country, their bankruptcy could trigger a larger economic crisis, making it imperative for the government to provide swift and appropriate support measures.

According to Bank of Korea statistics on the 14th, SME loans increased by 5.4 trillion won last month to 930.9 trillion won. This is the second-highest increase for the month of June since statistics began in 2004.

The problem is that about 60% of SME loans are secured loans rather than unsecured credit loans. If SMEs’ repayment capacity hits a limit due to the base interest rate hike, the shock could spread from the real economy to the asset market. A CEO of a small construction company said, "Raw material prices have risen, but since delivery prices are not linked, we are increasingly losing money. To at least pay employees’ salaries, we have no choice but to reluctantly take out loans." He added, "Especially in construction, since money comes in later depending on the progress of the project, initial costs must be borne by ourselves when starting new projects, so we cannot avoid taking out loans."

The interest burden from the base rate hike is also heavier on SMEs compared to large corporations. According to a report released by the Korea Institute for Industrial Economics & Trade in April titled 'The Impact and Implications of Base Interest Rate Increases on Major Manufacturing Industries,' the additional interest rate SMEs must bear when the base rate rises by 1 percentage point is 1.69%, which is 0.52 percentage points higher than that for large corporations (1.17%).

Including the big step, the base interest rate has risen four times this year alone, and it has been found that banks are demanding greater burdens from SMEs. Kim Yang-rok, chairman of the Honam-Jeju Reinforced Concrete Association, said, "Recently, a bank employee came to our association asking to connect companies in urgent need of funds. We connected four companies, but none of the deals were completed due to high interest rates and unreasonable collateral demands."

The increased interest burden is further worsening the management conditions of SMEs. In addition to rising raw material prices and exchange rates increasing import costs, labor costs are also rising due to difficulty in securing workers despite minimum wage increases. Park, CEO of a metal surface treatment company operating in Busan for 36 years, lamented, "With labor shortages and high inflation, it’s already hard to meet deadlines, and with interest rates rising, I am at a loss about how to run the company going forward." He added, "So far, I have taken out about 10 billion won in secured loans during the business, and just this year, monthly interest expenses have increased by 8 million won compared to the end of last year. I worry that if we cannot meet delivery deadlines, the large corporations we have contracts with might switch to other companies."

The industry is urging the government to take proactive measures. A representative from the Korea Federation of SMEs said, "Commercial banks, which recorded record-high net profits in the first half of last year and this year, should not apply excessively unfavorable loan conditions to SMEs following this base interest rate hike," and emphasized, "Active financial support policies from the government are also necessary." The Korea Employers Federation also stressed, "Many SMEs facing critical situations are expected to experience significant difficulties," and urged, "The government must prepare multifaceted measures to minimize market shocks."

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