[2020 National Audit] Loan and Private Debt Scale of Small Business Owners Forced Out by Banks Reaches 27 Trillion Won

Lee Dong-joo, Member of the Democratic Party of Korea. Photo by Lee's Office

[Asia Economy Reporter Moon Hyewon] It has been revealed that the loan scale through private lenders and loan sharks for small business owners who could not cross the bank threshold amounts to 27.9 trillion KRW.

On the 26th, Lee Dongju, a member of the National Assembly's Industry, Trade, Energy, Small and Medium Venture Business Committee from the Democratic Party of Korea, received data from the Ministry of SMEs and Startups on the joint survey of private lenders conducted by the Financial Services Commission, Financial Supervisory Service, and Ministry of the Interior and Safety in the second half of last year. According to the data, the loan scale from private lenders to small business owners is 15.9 trillion KRW.

Small business owners with financial vulnerability rated 7 or below, who find it difficult to obtain loans from private lenders, are being driven to private financing. According to the Ministry of SMEs and Startups data, the scale of private loans to small business owners reaches 12 trillion KRW.

Under the current financial support system for small business owners, those with medium to low credit (grade 4 or below) mainly have difficulty accessing banks and receive high-interest loans (5~18%) through secondary financial institutions and non-institutional finance. According to credit rating statistics of 2.3 million small business owners held by NICE Credit Rating, there are 551,000 medium-credit small business owners (grades 4~6) who are shunned by banks, and about 167,000 low-credit small business owners rated 7 or below.

Loans to small business owners through banks and secondary financial institutions were investigated to be 405.8 trillion KRW (as of last year). Banks account for 319 trillion KRW, and secondary financial institutions such as mutual finance, savings banks, and credit card companies account for 86.9 trillion KRW. In particular, since 2017, the proportion of loans from secondary financial institutions has gradually increased from 15.6% to 21.4%.

The loan proportion of banks is concentrated on high-credit small business owners with grades 1~3. High-credit small business owners account for 68.7% of the total, while the proportion of high-credit loans from banks reaches 72%. Medium-credit small business owners with grades 4~6 have no choice but to flock to secondary financial institutions such as savings banks. The average interest rate of secondary financial institutions is 5.36%, and savings banks stood at 9.76% as of June this year, which is 3.4 times that of commercial banks.

Assemblyman Lee proposed establishing a Small Business Finance Corporation and a Small Business Specialized Bank to provide stable and systematic support for small business owners. The plan to establish the Small Business Finance Corporation involves integrating the Small Enterprise and Market Service and the Korea Credit Guarantee Fund Central Association to create a new public institution. It combines the loan operations previously handled by the Small Enterprise and Market Service with the re-guarantee operations of the Credit Guarantee Fund Central Association. For medium to low credit small business owners, direct lending projects will be promoted, and for high-credit small business owners, re-guarantee projects will be conducted.

Assemblyman Lee said, “Small business owners and self-employed individuals have suffered disadvantages and discrimination in financial support from commercial banks, and policy fund support has always been insufficient due to limited budgets.” He added, “If a specialized financial institution for small business owners is established, valuable management funds can be delivered timely to small business owners who have always faced financial difficulties.” He also proposed that the Ministry of SMEs and Startups initiate a research project to promote the establishment of a small business specialized bank.