[Debt-Ridden CEO]① "Delinquency Means Bankruptcy"...A Small Business Cuts Staff to Pay Interest

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A small business owner producing films for display products in Anseong, Gyeonggi Province, laid off 4 out of 30 employees last month. The decision was made because they could no longer repay bank loans. "For the first time in 15 years since opening the factory, we ran a deficit last year. Labor costs and raw material prices soared while sales declined, and on top of that, interest rates increased, which was like a carpet bombing. Honestly, bank loans are scarier than anything else. If you miss even one payment, the delinquency interest rate applies, causing the interest you owe to balloon tremendously. To avoid bankruptcy, you have to pay the interest first no matter what. These days, some companies can’t even pay their employees on time just to cover interest, or like me, are reducing staff altogether."

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The main reasons small businesses are struggling can be summarized into four: rising labor costs, rising raw material costs, economic downturn, and rising interest rates. Among these, the most urgent issue is interest. Once delinquency begins, interest snowballs rapidly. According to financial authorities on the 3rd, the additional interest rate banks charge delinquent companies is 3 percentage points annually. The maximum rate is capped at 15%. Until 2018, additional interest rates of 6 to 9 percentage points were applied depending on the delinquency period, but these were lowered to the current level due to being excessive.

Small manufacturers are particularly affected. Most borrowed tens of billions of won from banks as facility funds to purchase buildings and machinery when starting their businesses. Until early last year, interest rates were 2-3%, but they have already more than doubled to 5-6%. Adding the 3 percentage points for delinquency brings it to 8-9%. For example, if a company borrowed 1 billion won, the annual interest cost would be 30 million won last year (3%), 60 million won this year (6%), and 90 million won if delinquent. Small business owners lament, "Delinquency means bankruptcy."

The number of bankrupt corporations nationwide has actually increased. According to statistics from the Ministry of SMEs and Startups, the number of bankrupt corporations per quarter last year was 37 in Q1 → 34 in Q2 → 30 in Q3 → 48 in Q4. The sharp rise in bankruptcies occurred at the end of the year when loan interest rates surged and the economy worsened.

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Small businesses that cannot endure are falling into the quagmire of delinquency one after another. The epicenter of the recent delinquency rate crisis is also small businesses. This is evident from the Financial Supervisory Service’s report on the "Status of Non-Performing Loans of Domestic Banks." Looking at the scale of newly generated non-performing loans in Q4 last year, small businesses stand out. It increased by 500 billion won from 1.2 trillion won in Q3 to 1.7 trillion won in Q4. During the same period, the scale of new non-performing loans for large corporations remained unchanged at 500 billion won, and household loans increased by 100 billion won from 600 billion won to 700 billion won.

The ratio of non-performing loans with delinquency periods over three months among bank loans shows a similar trend. As of Q4 last year, the non-performing loan ratio for small corporate loans was 0.75%, up 0.05 percentage points from the previous quarter. This deterioration is worse than that of large corporate loans, which fell by 0.01 percentage points to 0.49%, and household loans, which rose by 0.01 percentage points to 0.18% during the same period.

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In the secondary financial sector, such as mutual finance, the delinquency rate for corporate loans is rising faster than that for households. At the end of last year, the corporate delinquency rate was 2.23%, up 0.47 percentage points in one year. In contrast, the household delinquency rate was 0.91%, rising only 0.09 percentage points.

A corporate loan officer at a commercial bank said, "This figure means that the situation of small businesses is more difficult than that of large corporations or households. After the first quarter financial statements are completed and earnings are announced this year, the delinquency rate among small businesses is expected to rise further."

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There are also expectations that the loan threshold for small businesses will become even higher. An executive at a commercial bank said, "During economic downturns like the past foreign exchange crisis or global financial crisis, corporate bankruptcy rates increase. Companies that come to borrow money during such tough times are usually those that have exhausted all options, so banks have no choice but to conduct stricter loan screenings. Creditors may feel it has become harder to borrow money, but banks must pay more attention to risk management especially during difficult times."

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