[Inside Chodong] SMEs and Small Business Owners Enduring Winter with Debt

[Asia Economy Reporter Kim Jonghwa] I happened to run into an acquaintance I hadn’t seen for nearly two years due to social distancing, and we shared a cup of tea. He is the CEO of a small and medium-sized enterprise (SME). I know well that the business environment for SMEs in Korea’s manufacturing sector has been getting tougher year by year, but since it had been a long time since we last met, I couldn’t help but ask about his recent situation.

When I asked how this year had been, he replied, "There was hardly anything to smile about, and it was a year I cried a lot." He said he cried with emotion during the Olympics and also cried watching YouTube videos about business closures because it didn’t feel like someone else’s story.

Perhaps to lighten the mood, he added with a hearty laugh, "I’ve always lived a life of debt parties, but recently those parties have become bigger and more extravagant." I couldn’t find a proper response and just blew on my teacup awkwardly.

There probably aren’t many people who will remember this year as an exciting and joyful one. As a reporter, I used words like SME crisis, small business loans, closures, debt piles, and disaster relief funds almost daily in my articles. At least when covering topics like eco-friendliness, investment attraction, startups, and ESG, I felt a bit relieved.

Now, terms like 'debt investment' (bittu) and 'all-in borrowing' (yeongkkeul) have become buzzwords. The atmosphere across society is dominated by 'debt.'

According to the 'Financial Market Trends in November 2021' released by the Bank of Korea on the 8th, corporate loans by domestic banks increased by 9.1 trillion won in November alone, reaching a total of 1,068.4 trillion won.

The scale of corporate loan increases is the largest for November since related statistics began in 2009, and most of this increase was borrowed by SMEs. The proportion of SME loans in the increase of corporate loans in October and November was 77.6% (8 trillion won) and 70.3% (6.4 trillion won), respectively. This means that the majority of SMEs are surviving on 'debt.'

The number of marginal companies is also at an all-time high. Marginal companies are those with an interest coverage ratio below 100%, meaning they cannot cover interest expenses with operating profits. According to the Bank of Korea, as of the end of last year, the proportion of marginal companies was 40.9%, up 4.3 percentage points from 36.6% a year earlier. This is the highest since related statistics began in 2009. The banking industry expects the number of marginal companies to increase further as social distancing continues this year.

The number of loan repayment deferrals has also increased. According to reports citing data from the Financial Services Commission on the 14th, as of the end of October, the number of applications for principal repayment extensions and interest payment deferrals was 1,058,000 cases, amounting to 261.2 trillion won.

This exceeded one million cases just one and a half years after the program was implemented in April last year to support SMEs and small business owners facing financial difficulties due to COVID-19. In January this year, there were 441,000 cases amounting to 130.4 trillion won, so it has more than doubled.

Although the intention is to support small business owners and self-employed people to overcome the COVID-19 situation, repayment deferrals are not principal reductions, so the debt must be repaid eventually. The briefly enjoyed world of With-Corona (gradual daily recovery) has frozen again with the spread of variant viruses, making this winter even harsher for SMEs and small business owners. It is an urgent time for government support measures that can warmly cover them like a thick blanket without exception.

After finishing the now cold tea and parting ways, we could only exchange forced bright smiles and say to stay healthy and meet again soon. I couldn’t say “Please stay strong and may your business prosper,” but I take this opportunity to send my New Year’s greetings along with those wishes.