[Frozen Corporate Loans] ① SMEs "Interest Too High to Borrow"... Banks "Can't Lend Due to Risk"

"Loans that would have been approved before are now denied"
Banks managing risk, soaring interest rates

"Since interest rates suddenly started rising last September, new loans have been almost impossible to obtain. Each bank has tightened loan screening criteria significantly due to risk management, and interest rates more than doubled last year. Even small and medium-sized enterprises (SMEs) or small business owners with funds are repaying existing loans first, and those in difficult situations don't even dare to invest."

A branch manager of a commercial bank in Incheon recently described the corporate credit environment focused on SMEs and small business owners as "a situation where loans that would have been granted before are now not being approved." Rental business operators are a typical example. In the past, for newly constructed buildings, even if the property was not immediately rented out, banks would exceptionally approve loans by estimating rental income based on appraisals. Now, however, unless an actual lease contract is presented, approval is impossible. [Related Article] 'Frozen Corporate Loans'

The branch manager said, "Banks are conservative toward small individual business owners and low-credit SMEs, and the parties themselves are trying to reduce financial costs. The manufacturing sector switched to this stance early on, and the same atmosphere has spread to wholesale, distribution, and rental businesses."

Clearly Changed Corporate Loan Atmosphere
Self-Employed Loans Declining for 3 Consecutive Months
Larger Drop in SME and Large Enterprise Loans at Year-End

Following household loans, corporate loans have recently started to freeze. This is because banks began risk management after last year's Legoland incident, the economy has cooled, and interest rates have soared. Loans to individual business owners and SMEs, which had been steadily increasing since the COVID-19 pandemic, have shown a decline.

According to the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) on the 10th, the outstanding balance of loans to individual business owners began to decline from October last year. It decreased from KRW 315.27 trillion in September to KRW 314.81 trillion in October, then to KRW 314.75 trillion in November, and KRW 314.1 trillion in December. SME loan balances also turned to a downward trend, decreasing by about KRW 890 billion from KRW 599.1 trillion in November to KRW 598.21 trillion in December.

The trend in large enterprise loans is similar. When the corporate bond market nearly froze in the fourth quarter of last year, large companies in need of funds turned to banks. Loans increased by about KRW 6.67 trillion and KRW 4.17 trillion in October and November compared to the previous months, respectively, but decreased by KRW 5.8 trillion in December.

Typically, loan demand shrinks at year-end due to companies' financial statement closings, but in 2021, loan balances for individual business owners and SMEs continued to increase even in December. The decrease in large enterprise loan balances (-KRW 1.8 trillion) was also much smaller than in December 2022 (-KRW 5.8 trillion). This reflects the clearly changed corporate loan atmosphere as interest rates rose. According to the Korea Federation of Banks, the corporate loan interest rates of the five major banks (as of November) ranged from 5.39% to 5.91%, higher than household loan rates (5.29% to 5.62%).

Companies Withdrawing Investments
Last Year Was Difficult, but This Year Faces Survival Issues

Given these circumstances, companies are abandoning investment plans. A sales executive at a mid-sized construction company said, "We were planning to buy land to build a country house town in Gyeonggi Province, but we completely withdrew the investment. The management policy this year is to avoid starting new businesses as much as possible and focus on maintaining existing ones." He added, "The fact that golf appointments have completely disappeared since last fall due to lack of orders shows how bottomed out the real economy feels."

According to the '2023 Economic and Business Outlook from the Perspective of Companies' survey released last week by the Korea Chamber of Commerce and Industry (based on a survey of 2,254 manufacturing companies nationwide), 53.5% responded that their investment plans are at the 'same level' compared to last year. Those who said 'decreased compared to last year' accounted for 33.9%, while only 12.6% said they would increase investments. Within just one year, the proportion of companies planning to increase investments dropped by 29 percentage points compared to last year.

An executive in charge of corporate loans at a commercial bank said, "If interest rate hikes continue, low-credit companies that only said it was difficult last year will face survival issues this year."

Meanwhile, the Financial Services Commission, Ministry of SMEs and Startups, Korea Development Bank, and Industrial Bank of Korea plan to hold a meeting with the SME sector on the 11th to announce measures for operating fund loans and guarantee support.

[Image source=Yonhap News]