Companies Failing to Repay Loans... Highest Level in Six and a Half Years

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As the economic downturn continues, an increasing number of companies are unable to repay their bank loans on time. Due to severe stagnation in domestic demand and a slump in the real estate market, small and medium-sized enterprises (SMEs) in particular are facing worsening financial conditions, and delinquency rates on loans are surging.

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According to the Korea Federation of Banks and the Bank of Korea on August 12, the delinquency rate on corporate loans at domestic banks stood at 0.9% as of May. This is the highest level in six years and six months since November 2018, when it was also 0.9%. The corporate loan delinquency rate, which is calculated based on loans that are at least one day overdue on principal repayment, had dropped to the 0.3% range in 2022, but rose to 0.6% in 2024 and has continued to climb this year.

The rise in banks' corporate loan delinquency rates indicates that companies are experiencing deteriorating financial conditions and are unable to repay borrowed funds on time. While the delinquency rate on household loans at banks increased from 0.3% in 2022 to 0.5% in May this year, the corporate loan delinquency rate rose more sharply, from 0.3% to 0.9% during the same period, suggesting that corporate finances are worsening more rapidly than those of households.

The increase in corporate loan delinquency rates is particularly pronounced among SMEs rather than large corporations. According to the Financial Supervisory Service, the delinquency rate on SME loans (over one month overdue) at domestic banks was 0.95% as of May, significantly higher than the 0.15% rate for large corporations. The SME loan delinquency rate has nearly doubled from 0.51% in mid-2023, while the rate for large corporations rose only slightly from 0.12% to 0.15% during the same period. A Financial Supervisory Service official explained, "We are closely monitoring the rise in bank loan delinquency rates, especially among SMEs."

Even among the four major banks (KB Kookmin, Shinhan, Hana, and Woori), which primarily lend to relatively sound companies, the SME loan delinquency rate has reached its highest level in nine years. At the end of the second quarter of this year, the average SME loan delinquency rate at the four major banks was 0.5%, up 0.11 percentage points from 0.39% in the second quarter of last year. Based on first-quarter data, KB Kookmin Bank recorded its highest rate since the second quarter of 2016 (0.50%), and Shinhan Bank since the second quarter of 2017 (0.52%).

As domestic demand continues to stagnate, vacant stores line a commercial area densely packed in Sinchon, Seoul. Photo by Jo Yongjun

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The worsening financial conditions of SMEs are closely related to the sluggish domestic economy. Unlike large corporations, which have a high proportion of exports, most SMEs depend on the domestic market and have therefore been more heavily affected by the downturn in the Korean economy.

According to Statistics Korea, production at small and medium-sized manufacturers in May decreased by 4.7% year-on-year, while inventories increased by 0.5%. Production in the SME service sector increased by 0.6% in the same month, but this growth was slower compared to the 1.3% increase during the same period last year. As domestic demand continues to stagnate, related SME indicators have also deteriorated.

The number of marginal SMEs?those unable to pay interest properly for more than three years?is also on the rise. According to the Bank of Korea, the proportion of marginal companies among all SMEs increased from 15.6% in 2019 to 17.4% in 2023. Experts point out that in order for the SME sector to recover, government policies to boost domestic demand must be accompanied by restructuring of chronically marginal companies. A representative from the Korea Small Business Institute emphasized, "The government needs to lay the groundwork for promoting business transitions among chronically marginal and insolvent companies and expand financial support to facilitate restructuring."

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