[Asia Economy Reporter Song Hwajeong] Although business restrictions due to COVID-19 have been lifted, loan conditions for small business owners remain challenging. The growth rate of loans to individual business owners has slowed to the lowest level since 2011 due to soaring interest rate burdens.
According to Hanwha Investment & Securities on the 20th, the growth rate of individual business owner loans (Soho loans) has declined for 14 consecutive months, reaching the lowest point since the separate statistical disclosure period in September 2011. This contrasts with corporate loans, which have seen an increase in growth rate for 17 consecutive months, reaching the highest level since January 2013. Loans to small and medium enterprises have maintained an increase rate of around 11% year-on-year for 11 consecutive months.
The growth trend of individual business owner loans continues to slow. According to the Bank of Korea, individual business owner loans increased by 37.5 trillion KRW from January to September 2020, 30.6 trillion KRW from January to September 2021, and 20.1 trillion KRW from January to September this year, marking a decrease of over 10 trillion KRW compared to the previous year.
In September this year, loans increased by 1.8 trillion KRW, bringing the outstanding balance to 443.1 trillion KRW as of the end of September. This represents only a 6.4% increase compared to the same period last year. During the same period, corporate loans increased by 17.8%, and small and medium enterprise loans by 10.7%. The growth rate of individual business owner loans, which was 10.9% in August last year, has continuously slowed, dropping to the 8% range this year, then to the 7% range in June, and further down to the 6% range in August.
Although business restrictions due to COVID-19 have been lifted and operations have normalized, soaring interest rates and worsening economic conditions, along with financial institutions tightening loans to individual business owners due to concerns over defaults, have made borrowing difficult.
The rising interest rates are a burden. Some individual business owners are reducing loans due to the increasing interest burden, and from the perspective of financial institutions, since loans to individual business owners increased during COVID-19, rising interest rates raise default risks, leading to stricter loan screening and tighter lending.
According to the Small and Medium Business Research Institute, when the base interest rate rises to 3%, an estimated 884,186 individual businesses and 1,271,606 marginal small business owners face a critical situation where operating profits cannot cover debt interest for four consecutive quarters. If the base interest rate rises to 3.25%, the estimates are 885,010 individual businesses and 1,272,709 marginal small business owners. Assuming a 5% decrease in operating profits, the number of individual businesses facing critical situations exceeds 900,000, and marginal small business owners exceed 1.3 million. This accounts for 19% of all small business owners.
Jeong Eunae, a research fellow at the Small and Medium Business Research Institute, explained, "If interest rates rise by 1 percentage point, about 80,000 to 120,000 businesses will face critical situations," adding, "As interest rates rise, even small business owners with relatively good management conditions, such as higher sales and lower debt, are entering critical situations."
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