[Debt-Ridden CEO]② "It Is Difficult for SMEs to Repay Loans," Banks Label Them... Soaring Additional Interest Rates

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"These days, even when factories are put up for sale one by one, they don't sell. It's a serious situation. The problem lies with companies that took out large facility loans relative to their size during the low-interest-rate period. A few years ago, when buying a factory, the interest rate was 2-3%, but now it has more than doubled to 5-6%. If they could at least pay the interest, they could hold on, but since they can't, they are putting factories up for rent again. But what's the point of trying to sell? Who would buy in such a bad economic situation?" (On the 31st, operator of a semiconductor parts manufacturing SME in Siheung Industrial Complex)

Unlike the rapidly falling household loan interest rates, corporate loan interest rates are not moving easily. With interest burdens more than double compared to the past, SMEs are in an emergency. A bank branch manager in Siheung Industrial Complex said, "For SMEs, loan amounts are in the tens of billions of won, so even a 2-3 percentage point increase in interest rates raises annual interest costs by tens of millions of won, making them much more sensitive to interest rates than households," adding, "Stories of delinquencies are starting to be heard one after another from surrounding bank branches."

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According to the Consumer Portal of the Korea Federation of Banks as of February, the average corporate loan interest rate of the six major banks (KB, Shinhan, Hana, Woori, Nonghyup, and IBK) was 5.34%. This was 0.42 percentage points higher than the average household loan interest rate (4.92%). Although rates vary slightly by bank, 80-85% of the total corporate loan amount belongs to SMEs.

Corporate loan interest rates surged after the Legoland incident in October last year, when the corporate bond market became unstable. Until September, they were lower than household rates. However, in October, the rate jumped 1.12 percentage points from the previous month and has remained high since. The gap between household and corporate rates has also been widening since December last year.

Why have corporate loan interest rates risen so much? As the economy worsens, banks are reflecting the risk of loan defaults by charging relatively higher interest rates to companies. A representative from a commercial bank said, "SMEs vary greatly by industry, and as the economy deteriorates, banks have no choice but to raise the risk premium for industries with poor outlooks," adding, "On the other hand, household loan rates, especially mortgage loans, have clear collateral and the authorities pressure banks to lower rates, so banks reduce the risk premium, causing rates to fall."

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As interest burdens increase, SMEs' debt repayment ability is deteriorating. The interest coverage ratio (operating profit divided by interest expense), an indicator of whether a company can pay interest, has worsened. According to the Bank of Korea, the interest coverage ratio for SMEs was 3.7 times at the end of 2021 but dropped to 2.9 times in the third quarter of last year. This means interest expenses have increased relative to operating profit. Meanwhile, sales are also in trouble. During the same period, the year-on-year sales growth rate slipped from 14.4% to 10.4%.

With sales signaling red and interest rising, SMEs are reluctant to take out loans. The year-on-year loan growth rate for SMEs peaked at 16.2% in the second quarter of last year but declined as interest rates rose sharply. By December, it had dropped to 12.6%.

The CEO of an SME in Incheon that manufactures LED bulbs for automobile headlights said, "If companies fail, employment becomes unstable, workers can't earn money, and this increases the likelihood of delinquencies for both companies and households at the same time," adding, "What’s the point of the financial authorities cutting personal loan rates by 1 percentage point? Everyone in Korea is a worker, so support should start with reducing corporate loan interest rates first."

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