FKCCI "Warning Signs of Corporate Loan Defaults... Need to Adjust the Pace of Interest Rate Hikes"

[Asia Economy Reporter Park Sun-mi] There are warnings of potential defaults on loans among domestic companies, prompting calls for measures such as adjusting the pace of base interest rate hikes and reducing tax burdens.

On the 31st, the Federation of Korean Industries pointed out five factors indicating signs of corporate loan distress: ▲the surge in corporate loans since COVID-19, ▲deterioration in companies' loan repayment ability, ▲high proportion of variable interest rate loans, ▲concentration of loans in vulnerable sectors such as real estate, and ▲increase in loans through non-bank institutions.

Corporate loans have ballooned like a snowball since the COVID-19 outbreak. Over the 10 years before COVID-19 (2009 to the end of 2019), corporate loans grew at an average annual rate of 4.1%, whereas in the current period (end of 2019 to the first half of 2022), the average annual growth rate over two and a half years reached 12.9%. As a result, the amount of corporate loans increased by 345.3 trillion won (35.4%) from 976 trillion won at the end of 2019 to 1,321.3 trillion won as of the first half of this year. This increase surpasses the total loan growth of 324.4 trillion won over the previous 10 years before the COVID-19 crisis.

Moreover, not only has the amount of loans for Korean companies significantly increased, but their repayment capacity has also rapidly weakened. The DSR, an indicator that assesses debt repayment ability, showed that Korean companies’ average DSR rose from 37.7% before the COVID-19 outbreak (2019) to 39.7% in the first quarter of this year, indicating a decline in repayment capacity.

Most corporate loans are variable interest rate loans, which increase the burden of principal and interest repayments when interest rates rise. As of September this year, more than 7 out of 10 companies (72.7%) had variable interest rate loans based on outstanding loan balances, while only 2 to 3 out of 10 (27.3%) had fixed interest rate loans. The proportion of variable interest rate loans among new loans reached a high of 73.0% as of July this year.

The Federation of Korean Industries proposed two measures to prevent corporate loan defaults: ▲adjusting the pace of base interest rate hikes and ▲reducing corporate tax burdens through improvements in the corporate tax system. While it is inevitable for domestic base interest rates to follow the aggressive rate hikes in the U.S., the federation emphasized that given the rapidly worsening financial conditions of companies, it is time to slow the pace of rate increases. Additionally, although a government tax law amendment bill aiming to lower the top corporate tax rate from the current 25% to 22% and simplify the tax base brackets from four to two stages is pending in the National Assembly, it has yet to be properly discussed, highlighting the need for prompt deliberation.

Choo Kwang-ho, head of the economic division at the Federation of Korean Industries, expressed concern, saying, “During the past global financial crisis, liquidity in the market increased but companies faced financial difficulties and credit crunches as interest rates rose. Currently, interest rates are rising even faster than then, making it difficult for companies to bear the growing repayment burden.” He added, “In addition to adjusting the pace of rate hikes and reducing tax burdens, a contingency plan to support corporate liquidity in emergencies should also be prepared in advance.”

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