As the Base Interest Rate Rose, Companies Also Switched to Fixed Rates

November Corporate Fixed-Rate Loans Account for 34.0%
Up 4.9%P in One Month... Largest Increase in 14 Years
Loan Rates Rise Faster for SMEs than Large Corporations
Base Rate Expected to Climb Further... Direct Interest Burden on SMEs

As the base interest rate entered an upward phase, a clear preference for fixed-rate loans among companies has emerged. The proportion of fixed-rate loans in total loans also recorded its highest level in six months. However, the share of variable-rate loans still exceeds that of fixed-rate loans, suggesting that small businesses with weak capital and high borrowing dependence are likely to be hit hard by the steep rise in interest rates.

According to the Bank of Korea on the 20th, the proportion of fixed-rate loans for companies based on new loan issuance in November was 34.0%, the highest since April last year (36.3%). This is an increase of 4.9 percentage points from 29.1% in the previous month. The growth rate of fixed-rate loans is the steepest in about 14 years since December 2007, when it rose by 8.4 percentage points in one month.

The share of fixed-rate loans in the corporate finance sector had been declining due to the COVID-19 pandemic and the resulting base rate cut trend. As recently as August, it was 29.4%, the lowest in over a decade. However, when the Bank of Korea raised the base rate by 0.25 percentage points at that time and hinted at the possibility of further hikes, the proportion began to rise by 0.2 to 0.3 percentage points each month.

The share of variable-rate loans was 66.0%, marking a decline for three consecutive months. Excluding products linked to the prime rate or deposit interest rates, the share of market rate-linked loans was 58.5%, the lowest since April last year (56.1%).

The scale of domestic corporate loans is rapidly increasing. This is because major banks view corporate finance as a growth avenue amid difficulties in household sector operations due to total volume regulations. According to the bank management statistics announced by the Bank of Korea at the end of last year, the outstanding balance of domestic corporate loans was 1,065.7 trillion won. This increased by 45.3114 trillion won (4.4%) from 1,020.3886 trillion won at the end of 2020.

Still Half Are Variable-Rate... Another Base Rate Hike Would Hit SMEs Hard

The problem is that more than half still choose variable-rate loans. In particular, concerns have been raised that the rapid rise in loan interest rates for small and medium-sized enterprises (SMEs) could increase risks from future rate hikes. Based on new loan issuance in November, the loan interest rate for large corporations was 2.90%, up 0.41 percentage points from a year earlier. During the same period, SMEs saw an increase from 2.86% to 3.30%, a rise of 0.44 percentage points. This means SMEs bear a heavier interest burden than large corporations during periods of rising rates.

Loan interest rates for corporate loans in the secondary financial sector, mainly used by small businesses, are also rising. The corporate fund loan rate at savings banks was 6.77%, and 3.67% in mutual finance institutions. These rates increased by 0.84 percentage points and 0.19 percentage points respectively over the past year.

The base interest rate is also expected to rise further. Although the Bank of Korea raised the base rate by 0.25 percentage points to 1.25% this month, it described the monetary policy stance as "accommodative." Bank of Korea Governor Lee Ju-yeol also stated that "even if the base rate rises once more to around 1.5%, it cannot be considered tightening." This is why concerns are emerging that the principal and interest repayment burden for SME borrowers who did not choose fixed rates may increase further.

A financial sector official said, "Since variable rates are usually lower than fixed rates, companies choose variable rates to save on immediate interest payments," adding, "During periods of rising interest rates, borrowers with variable-rate loans may face increasing interest burdens."