Base Interest Rate Raised Again... Small and Medium Enterprises and Small Business Owners Facing Closure Crisis

Small and Medium-Sized Business Owners Sigh Over High Interest Rates
"1.24 Million Small Business Owners at Risk of Bankruptcy"
"Serious Concerns Over Base Rate Hike Decision"
Call to Restrain Excessive Loan Interest Rate Increases

The Financial Monetary Policy Committee of the Bank of Korea raised the base interest rate to 3.0% on the 12th. The photo shows a counter at a commercial bank in downtown Seoul. Photo by Hyunmin Kim kimhyun81@

Jo Jin-young (pseudonym), the CEO of a lighting company operating in Goyang-si, Gyeonggi-do, has been running his business at a loss for the past five years. He imports key components from China to manufacture finished products and supplies lighting fixtures to construction sites, but recently, soaring raw material prices have reduced profits, forcing him to rely on loans to keep the business afloat. Jo said, "The company needs to generate annual sales of 5 billion KRW to operate normally, but this year, I expect sales to be around 3.5 billion KRW, which is lower than that."

He added, "It might be better to close the company quickly, but since this is the only thing I know how to do, I am holding on," and "I need to take out additional loans, but even that is not easy." The loan interest rate offered by his main bank recently soared to around 8%. Since the base rate was raised by 0.5 percentage points on the 12th, it is obvious how much more the interest burden will increase.

Small business owners are also struggling with high interest rates. Lee (surname), who has been running a restaurant in Geumcheon-gu, Seoul, for three years, is troubled by rising loan interest. He complained that the interest on his variable-rate loan has nearly doubled recently. He had hoped sales would improve as the COVID-19 spread eased, but now he is wrestling with high interest rates and high inflation.

On the 12th, the Bank of Korea held a Monetary Policy Committee meeting and raised the base rate by 0.5 percentage points from 2.5% to 3.0%. Uncertainties such as COVID-19, economic volatility, and disasters are increasing the crisis for small business owners, making the situation worrisome. The Korea Institute for Industrial Economics & Trade recently released a study showing that if the Bank of Korea takes a ‘big step’ by raising the base rate to 3.0%, 1.24 million small business owners could face the risk of bankruptcy.

A restaurant owner in downtown Seoul is updating the menu with increased prices. Photo by Mun Ho-nam munonam@

The institute estimates that when the base rate reaches 3.0%, an additional 60,000 small business owners will face critical situations, bringing the total number of marginal small business owners to approximately 1,243,000. Marginal small business owners are defined as those who have been in a state of insolvency for more than a year, unable to cover even their interest expenses with operating profits.

Researcher Jeong Eun-ae, who led the study, said, "Small business owners, who account for more than 90% of all enterprises, have a very large scale of insolvency when it occurs, and the ripple effects on society are also significant." She emphasized, "Since insolvency among small business owners can lead to household insolvency, it is urgent to proactively respond to the risk by investigating and preparing measures for insolvent small business owners."

The small and medium-sized enterprise (SME) sector issued a warning regarding the recent base rate hike decision. They urged the financial sector to refrain from excessive loan interest rate increases. Immediately after the news of the base rate hike was announced, the Korea Federation of SMEs released a statement expressing "serious concerns over the Monetary Policy Committee’s decision to raise the base rate by 0.5 percentage points for the second consecutive time," and appealed that "SMEs are facing increasing difficulties due to prolonged COVID-19, soaring raw material prices, rising loan interest rates, and a global economic downturn."

Regarding the increased financial burden on SMEs, the industry unanimously voiced concerns. The Korea Federation of SMEs stated, "The government should prepare active financial support measures, such as expanding policy fund support, to prevent SMEs temporarily in crisis from collapsing, and the financial sector should refrain from raising loan interest rates excessively beyond the base rate hike so that SMEs and small business owners pushed to the brink can endure."