"10% of Companies Are Zombies, Affecting Healthy Firms... Need to Weed Them Out"

The proportion of zombie companies unable to pay interest reaches 10%
Hurting normal companies and negatively impacting the national economy
Activating restructuring and removing non-performing companies will benefit the economy

Zombie Company AI Image

One out of every ten domestic companies has been identified as a chronic non-performing company (so-called zombie company) that cannot even pay interest despite making money. As the low-interest rate trend continues, the proportion of zombie companies is increasing every year. The survival of low-productivity zombie companies is adversely affecting the growth of normal companies, prompting calls for the government and banks to take more proactive restructuring measures.

The proportion of non-performing companies rises annually, reaching 10%

According to the report "Chronic Non-Performing Companies: Causes, Impacts, and Measures" by the Korea Institute of Finance on the 20th, among 36,990 companies subject to external audits, including those listed on the KOSPI and KOSDAQ, the proportion of zombie companies has significantly increased from 3.01% in 2016 to 5.42% in 2020, 6.3% in 2021, and 9.8% in 2023.

The institute defines zombie companies as insolvent firms whose interest coverage ratio?operating profit divided by interest expenses?has been below 100% for three consecutive years, and whose debt ratio exceeds 200%. An interest coverage ratio below 100% means that the company cannot even cover its bank interest payments with its earnings.

By industry, the chronic non-performing debt ratio was high in real estate, construction, transportation, and accommodation and food services. Real estate and construction were affected by the prolonged slump in the real estate market. Transportation was heavily impacted by the COVID-19 pandemic and supply chain issues, while accommodation and food services suffered from weak consumer demand.

Looking at the chronic non-performing debt ratio by company size as of the end of 2023, large companies accounted for only 5.6%, while small companies reached 16.1%, and medium-sized companies 18.7%. This suggests that smaller companies are facing greater difficulties in survival.

The report cites the prolonged low-interest rate environment as the main reason for the increase in zombie companies. Under low interest rates, financial institutions have little incentive to clean up non-performing assets and have continued to allow interest payments without principal repayment, leading to an increase in chronic non-performing companies. The structure of extending loan maturities without writing off bad debts because of low interest rates, despite the companies' poor soundness, is a major cause of the rise in insolvent companies.

Policy finance was identified as a key reason why insolvency among small and medium-sized enterprises (SMEs) can persist longer than among large companies. Most policy finance handled by general banks targets SMEs, and it is estimated that chronic non-performing SMEs survive by relying on policy finance.

Zombie companies hinder the growth of normal companies and have a negative impact on the overall economy. Low-productivity companies occupy resources, putting downward pressure on product prices within industries, while labor and financial costs face upward pressure, which can suppress the growth (investment and employment) of high-productivity normal companies. Analysis shows that when the proportion of chronic non-performing companies increases by 1 percentage point, the investment growth rate of normal companies decreases by 0.08 percentage points, and the employment growth rate decreases by 0.07 percentage points.

Activating restructuring and removing non-performing companies will benefit the economy

The report emphasized that as interest rates have begun to fall again since the end of last year, the rate of increase in zombie companies may accelerate, and financial authorities should take more proactive steps to remove zombie companies.

In particular, it pointed out the need for financial institutions and supervisory authorities to take preemptive measures by strengthening microprudential supervision such as stress tests to prevent an increase in chronic insolvency among companies. It also added that thorough post-management by supervisory authorities is necessary to ensure that companies undergoing rehabilitation procedures properly implement follow-up measures.

To encourage banks to actively promote corporate restructuring, it is also worth considering providing incentives related to restructuring to bank management. Other necessary measures to prevent non-performing companies include activating debt-to-equity swaps for workout companies and establishing funds to improve corporate financial structures.

Senior Research Fellow Lee Ji-eon of the Korea Institute of Finance stated, "Chronic insolvency causes a vicious cycle in the corporate ecosystem and inefficiency in resource allocation, hindering economic growth momentum and vitality. Therefore, for chronic non-performing companies, appropriate restructuring along with the companies' self-help efforts and monitoring by financial institutions and supervisory authorities is essential."

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