"Pouring Money into Self-Employed... 4% Interest Loans Account for Highest Share in 7 Years"

Loan interest rates below 4-5% account for 26.3%
Highest level in 7 years and 3 months since February 2015

Interest rate competition among banks slowed the rise in SME loan rates,
but benchmark rates surged, marking the start of a full-scale rate increase

[Image source=Yonhap News]

[Asia Economy Reporter Shim Nayoung] The proportion of small and medium-sized enterprises (SMEs), including sole proprietors, with loan interest rates in the 4% range has significantly increased. Although the government has been rolling out various loan-related measures to support small business owners and SMEs affected by COVID-19, they are not free from the impact of rising interest rates.

According to the Bank of Korea's electronic disclosure system on the 1st, an analysis of the deposit and loan proportions by interest rate level for SMEs (based on new transactions in May) showed that the share of loans with interest rates between 4% and 5% was 26.3%. This is the highest level in 7 years and 3 months since February 2015 (28.3%). In June of last year, it was only 6.2%, meaning it has more than quadrupled in one year. During the same period, loans with interest rates below 3% sharply decreased from 70.7% to 17.8%, while those between 3% and 4% rose from 22.2% to 48.2%.

A financial sector official said, "Although the pace is slower than for personal loans, small business owners and SMEs have officially entered the sphere of rising interest rates," adding, "By the end of this year, their interest rates will rise further depending on the pace of the Bank of Korea's base rate hikes."

Meanwhile, the average interest rate on SME loans in May, as compiled by the Bank of Korea, was 3.79%, which is lower than the household loan interest rate of 4.14%. Banks had to raise interest rates to reduce household loans due to last year's total volume regulations on household lending. As the capacity for household loans was constrained, banks fiercely competed to increase corporate loans, resulting in the unusual phenomenon where SME loan interest rates became lower than household loan rates.

An official from a commercial bank said, "Thanks to competition among banks, the rise in SME loan interest rates has been somewhat delayed, but the benchmark interest rates used to calculate loan rates are rising very quickly, so the increase in interest rates will be significant going forward," adding, "Although the government is pouring in support funds, on the other hand, the number of SMEs and small business owners taking out loans at 4-5% interest rates is increasing."

The benchmark interest rate for SME loans is the AAA-rated 1-year financial bond rate. As of the 29th, it recorded 3.455%, the highest level in 10 years and 1 month since May 30, 2012 (3.46%).

Meanwhile, in the household loan deposit bank interest rate proportions (based on new transactions in May), it is noteworthy that the share of loans with interest rates of 5% or higher reached 11.1%, the highest level in 8 years and 8 months since September 2013. The shares for below 3%, 3-4%, and 4-5% interest rates were 9.5%, 55.7%, and 23.7%, respectively.