[Unstoppable SME Loans] Soaring to 174 Trillion Due to COVID-19... Warning Signs of Defaults

Over 80 Trillion Increase Annually During 2 Years of COVID-19
Double the Average of the Previous 3 Years
10 Times the Increase of Large Corporations Last Year

Financial Services Commission Chairman Ko Seung-beom is delivering opening remarks at the government-party consultation on financial support for small and medium-sized enterprises and small business owners held at the National Assembly on the 15th. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Sim Nayoung] Kim Minseok, the CEO of a small and medium-sized enterprise (SME) that produces aluminum frames needed for loading airplane cargo, these days cannot sleep at night without a bottle of soju and sleeping pills. This week, he borrowed 300 million won from a bank to prevent delays in promissory note payments. Although cargo planes have been booming due to COVID-19, the volume is concentrated with large airlines, and since they have contracts with overseas companies, he has been unable to find proper sales channels. If there were even orders from low-cost carriers (LCC) passenger planes, it would provide some relief, but the tightly closed skies show no sign of opening. Kim said, "I have borrowed over 1 billion won in loans over two years to support 16 employees. The pandemic has to end for more planes to fly and contracts to be made, but these days, I just stare blankly at the sky."

Since the COVID-19 outbreak, the loan volume for SMEs, including self-employed individuals, has increased by 173.4729 trillion won over two years. According to the Bank of Korea's review based on domestic deposit banks, SME loan volumes have increased by more than 80 trillion won annually since COVID-19. Compared to the three-year average before COVID-19 (42.1 trillion won), the increase is about double. A financial sector official said, "SMEs and small business owners borrowed operating funds, and policy financial institutions expanded loan support, resulting in a high growth rate."

▲ Based on deposit banks (including general, specialized, and foreign banks)

The increase in loans for SMEs was much steeper compared to large corporations. In the first year of COVID-19, the increase in SME loans (8.9753 trillion won) was about four times that of large corporations (1.97238 trillion won), but in the second year, the gap widened to about ten times (SMEs 8.43976 trillion won, large corporations 0.82243 trillion won). Major large corporations recovered their business performance through exports, but SMEs and small business owners, with no escape route, continued to survive on debt.

There is an analysis that the increase in SME loans will continue this year as well. Presidential candidates from both ruling and opposition parties pledged tens of trillions of won in support for small business owners immediately after election. Lee Sieun, a research fellow at KDB Future Strategy Institute, said, "With the government's COVID-19 response and new liquidity supply programs from the financial sector, SME loans will increase," adding, "SMEs in vulnerable industries with deteriorating debt repayment capacity are expected to maintain a high level of credit risk."