"5% Is Cheap. Now an Average of 6%"... Soaring Credit Loan Interest Rates for Small Business Owners

Average Interest Rates on Small Business Credit Loans from 6 Major Banks
Feb-Apr 5.61% → May-Jul 6.02%
Small Business Credit Ratings Decline, Banks Raise Additional Interest Rates

Choi Mi-yoon (45), who opened a delivery snack bar last year, is currently looking into loans to add a new business line as sales have not increased as expected. Choi said, "I was also rejected when applying for the Small Business Special Guarantee from the Credit Guarantee Foundation," and added, "It seems difficult to rely on government policy funds in the second half of the year." According to her, the only option available at the bank is a credit loan with an interest rate exceeding 5%, but she is unsure if it is a low rate. "Even if I try to find a cheaper product, it is useless because the store's sales are small right now," she sighed.

Photo by Jinhyung Kang aymsdream@

Interest rates on credit loans for small business owners have jumped significantly over the past few months. After a lull earlier this year, loan interest rates began to rise in April. The average interest rate, which was in the 5% range, has now climbed to the 6% range. According to the Korea Federation of Banks on the 5th, the average interest rate on new personal business owner credit loans issued by the six major banks (IBK, Kookmin, Shinhan, Hana, Woori, and Nonghyup) from May to July was 6.02%. This is a 0.41 percentage point increase compared to the 5.61% average from February to April.

Looking at the distribution of interest rate ranges, the proportion of loans under 5% has sharply decreased, while those in the 5-6% range have increased. The share of loans under 5% at the six major banks all declined. Woori Bank saw the largest drop (44.5% → 15%). IBK (36.1% → 22.4%), Kookmin Bank (20.2% → 8%), and Nonghyup Bank (26.5% → 15.4%) experienced similar decreases. Hana Bank (37% → 29.3%) performed relatively better. Shinhan Bank originally had a low proportion of loans under 5% (7.2% → 6.6%).

On the other hand, the share of loans with interest rates in the 5-6% range increased during the same period. Woori Bank again had the largest increase (38.2% → 55.2%), followed by Kookmin Bank (66.8% → 79.9%), Nonghyup Bank (61.2% → 69.7%), IBK (44.7% → 50.6%), and Hana Bank (60.9% → 67.1%). Although Shinhan Bank's increase was small (78.5% → 81.5%), it maintained the highest overall proportion.

Recently (based on new loans from May to July), the proportion of loans with interest rates in the 7-8% range was highest at Woori Bank (22.7%), followed by IBK (18.4%) and Nonghyup Bank (11.7%).

A representative from a commercial bank stated, "Although the financial bond interest rate, which serves as the benchmark for small business credit loan rates, has risen slightly, the decline in creditworthiness of individual business owners appears to have influenced the increase in interest rates." For this reason, banks have added risk premiums to small business loans. The six major banks raised the risk premium on personal business owner credit loans by between 0.1 and 1 percentage point from February-April to May-July. Considering that the average one-year financial bond rate rose by about 0.16 percentage points during the same period, the increase in risk premiums was much larger.

According to the Financial Supervisory Service, the delinquency rate on personal business owner loans was 0.41% as of June. This is a 0.04 percentage point decrease from the end of the previous month but a 0.25 percentage point increase compared to June last year. Amid this, personal business owner loans continue to grow steadily. The loan balance at the end of August for five major banks excluding IBK was 318.1928 trillion won, marking eight consecutive months of increase since January this year (313.065 trillion won).