[SME Loan Concerns] ① Resembling IMF and Financial Crisis... SME Interest Rates Dropped as Much as Large Corporations

SME Loan Interest Rate at 5.14%
Only 0.13 Percentage Points Difference from Large Corporations

SME Interest Rates Were Only This Low Compared to Large Corporations During the Foreign Exchange Crisis and Financial Crisis

Impact of Government Guarantees, High Interest Rates, and Economic Downturn

Loan interest rates for small and medium-sized enterprises (SMEs) have dropped to levels comparable to those of large corporations. Typically, SMEs have higher loan interest rates than large corporations due to lower credit ratings, making this an unusual situation. This phenomenon also contradicts the existing perception that SMEs have been struggling more than large corporations as the economy worsened this year.

How much has the interest rate gap between the two narrowed? According to the Bank of Korea, as of April, the loan interest rate for SMEs at deposit banks (based on new loan amounts) was 5.14% per annum. This was only 0.13 percentage points higher than the large corporations' loan interest rate of 5.01%. Looking back over the past decade, although it varied slightly at times, SME loan interest rates were generally at least 0.30 percentage points and up to 0.70 percentage points higher than those for large corporations. However, this trend began to change in the second half of last year.

SME Interest Rates Lower Than Large Corporations During Crises

From November last year to April this year, the interest rate gap between the two narrowed from 0.52 percentage points → 0.44 percentage points → 0.37 percentage points → 0.21 percentage points → 0.09 percentage points → 0.13 percentage points. Although interest rates for both SMEs and large corporations fell, the faster decline in SME rates was the main reason for the narrowing gap. If this trend continues, there is a possibility that the interest rates could even reverse.

Historical records show that SME loan interest rates have fallen to levels similar to or lower than those of large corporations only twice before: during the 1997 Asian Financial Crisis and immediately after the 2008 Global Financial Crisis. Each time the economy faced difficulties, interest rate reversals emerged.

The causes were different in each case. According to a 2009 report by the Korea Institute of Finance titled "Analysis of the Interest Rate Reversal Phenomenon between SMEs and Large Corporations," during the 1997 Asian Financial Crisis, SMEs had better financial soundness and lower delinquency rates than large corporations. During the crisis when large corporations collapsed one after another, SMEs actually had higher creditworthiness, resulting in lower interest rates than large corporations.

On the other hand, during the financial crisis, SMEs were in much worse condition than large corporations. The SME delinquency rate, which was 1.70% at the end of 2008, sharply rose to 2.37% and 2.67% in January and February 2009, respectively. During the same period, the delinquency rates for large corporations remained relatively low at 0.34%, 0.59%, and 0.63%. The SME credit risk index (47) surveyed by the Bank of Korea in the first quarter of 2009 was also higher than that of large corporations (19).

Government Policies Lower Interest Rates When SMEs Struggle

Nevertheless, from January to July 2009, SME interest rates remained 0.1 to 0.2 percentage points lower than those of large corporations. What caused this interest rate reversal? The expansion of government-guaranteed loans targeting SMEs was identified as the main reason. As SME conditions worsened after the financial crisis, the increase in low-interest guaranteed loans led to a drop in interest rates.

At the time, Seobyungho, a research fellow at the Korea Institute of Finance, explained, "During difficult times, loans to SMEs fully guaranteed by the government increase. Although interest rates usually correlate with creditworthiness, banks can set lower rates because they can recover funds even if defaults occur." In fact, domestic banks' SME loans increased by 6.1 trillion won in January and February 2009, while new guarantees from guarantee institutions amounted to 5.2 trillion won.

Summarizing the financial sector's perspective, this year's situation resembles the financial crisis more than the Asian Financial Crisis in that SMEs have become more vulnerable. Interest rate hikes, government support, and economic downturn have paradoxically resulted in lower SME loan interest rates.

A senior executive in charge of corporate loans at Industrial Bank of Korea said, "Although the upward trend in interest rates has paused, rates still exceed 5%. Amid the recession, psychological burdens on SMEs and self-employed individuals remain high, leading to reduced investments. This has decreased loan demand, intensifying interest rate competition among banks," he analyzed.

A corporate loan officer at a commercial bank also said, "Although SME loans are increasing, the growth rate has significantly slowed compared to last year. As the share of new loans shrinks, banks are desperately lowering interest rates to attract SME loans and improve their loan sales performance."

Intensified Interest Rate Competition Among Banks as New Loans Decline

Looking at SME loans (including individual business loans) from the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), a chilly atmosphere is noticeable. The increase between January and May last year was 24.6 trillion won. However, from January to May this year, it only rose by 10.4 trillion won, less than half the previous year's level. Meanwhile, during the same period, large corporation loan increases rose from 7.6 trillion won to 12.8 trillion won.

Government agency-guaranteed loans with low interest rates continue to be supplied steadily. According to the Financial Services Commission, the scale of credit guarantees (Credit Guarantee Fund, Technology Guarantee Fund, Regional Credit Guarantee Foundations) increased by about 9 trillion won last year (from 141 trillion won in 2021 to 149.9 trillion won in 2022). A guarantee institution official said, "Since the economy is still not good this year, the supply and demand for guaranteed loans remain steady." The financial authorities' facilitation of refinancing loans, which can lower interest rates, also contributed to the reduction in SME loan interest rates.

Another commercial bank official said, "Even though interest rates are falling relatively quickly, the fact that new bank loans are not increasing compared to last year shows that the situation is not that good." This is why the narrowing of SME loan interest rates to levels comparable to large corporations cannot be seen as entirely fortunate.

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