[Why&Next] SME Loans Exceeding 1000 Trillion Won, Interest Rates Rising Again

'Delinquent Companies' Begin to Appear at Gangnam Bank Branches
Interest Rates Rise for Small and Medium Enterprises Including Small Business Owners
On the 16th, Authorities and Financial Groups Prepare Win-Win Measures to Ease High-Interest Borrowers' Burden

On the 16th, a rental notice is posted at a store in Insadong, Jongno-gu, Seoul. Photo by Jinhyung Kang aymsdream@

"In fact, small and medium-sized enterprises (SMEs) dealing with bank branches in Gangnam rarely had delinquencies. However, recently, even in this neighborhood, there are 3 to 4 ultra-short-term delinquent companies each month that cannot pay interest. It is clearly felt that the situation is worsening, especially among SMEs these days." (Deputy branch manager of a commercial bank in Gangnam, Seoul)

"The interest I have to repay starting tomorrow has increased by another 800,000 won. With loan interest rates exceeding 6%, I think I need to tighten my belt even more. It feels bitter, as if I am running my business just to pay off debt. Sales in the hall drop sharply when the weather gets cold, and since we sell galbi, delivery is not an option... These days, I have so many worries that I need to drink a bottle of soju to sleep." (Owner of a charcoal-grilled galbi restaurant in Guri, Gyeonggi Province)

'102.14907 trillion won' is the scale of SME loans by domestic deposit banks as of August this year. This includes loans to small business owners as well. The SME loan scale exceeded 1000 trillion won starting from April this year. It is more than 100 trillion won larger than the household debt (901.8411 trillion won) of deposit banks, which financial authorities consider the biggest problem.

As the loan scale for SMEs and small business owners has grown this much, President Yoon Suk-yeol also targeted banks. At the Cabinet meeting on the 30th of last month, he demanded measures, saying, "He sighed deeply, saying that it feels like 'being a servant to the banks' as small business owners struggling with high interest rates hand over the money they earn from hard work entirely to repay loan principal and interest."

Rising Loan Interest Rates for SMEs and Small Business Owners Again

After seeming to decline, SME loan interest rates have recently started to rise again. According to the Bank of Korea's announcement on the 'Proportion of SME loans by interest rate level at deposit banks (newly originated amount, as of September),' loans with interest rates above 5% (61.1%) outnumbered those with rates below 4% (38.9%) by 22.2 percentage points. This gap has widened compared to August's difference (above 5% at 57.5%, below 4% at 42.5%), which was 15 percentage points. This means that more SMEs have taken out new loans at high interest rates above 5%.

In fact, from May this year, the proportion of loans with interest rates below 4% had been steadily increasing, while the proportion of loans above 5% had been decreasing. However, this trend reversed starting in September.

Compared to large corporations, SME loan interest rates have risen more. The interest rate for large corporations at deposit banks showed a stable trend from August to September (5.17% → 5.24%), moving only 0.01 percentage points. In contrast, SME interest rates rose by 0.1 percentage points (5.24% → 5.34%). A corporate loan officer at a commercial bank said, "Loan interest rates increased by about 30 to 40 basis points last month," adding, "Since SMEs usually borrow tens of billions of won, even a slight change in interest rates causes significant impact."

The rise in loan interest rates for SMEs, including small business owners, is partly due to the increase in market interest rates but also because delinquency rates have risen. When recovery risk increases, banks must set higher interest rates accordingly. According to the Financial Supervisory Service, as of August, the delinquency rate for small and medium-sized corporations rose by 0.08 percentage points month-on-month (0.51% → 0.59%), and the delinquency rate for individual business loans increased by 0.05 percentage points (0.45% → 0.50%). The delinquency rate for SMEs is rising faster than that for large corporations or household loans.

Measures Expected to Ease Burden on High-Interest Borrowers

Policy fund loan interest rates are relatively low, but this is limited. According to the '2023 SME Financial Status Survey' by the Industrial Bank of Korea, the average interest rate for loans secured by credit guarantees from institutions such as the Korea Credit Guarantee Fund was 3.14% last year. However, only 6.3% of SMEs received new policy funds last year. In contrast, 12.5% of SMEs received new loans from banks. The report explained, "The borrowing conditions through banks have worsened compared to the previous year," and "16.6% of SMEs have experienced rejection when applying for new bank loans, with 'exceeding loan limits' and 'lack of collateral' being the main reasons."

On the 16th, the Financial Services Commission and the Financial Supervisory Service will meet with chairpersons of major financial holding companies in mid-month. It is expected that they will announce win-win financial measures to support low-income earners and small business owners. Although Hana Bank and Shinhan Bank have introduced financial support measures worth 100 billion won targeting small business owners and self-employed individuals, authorities believe this is insufficient. A senior official from the Financial Services Commission said, "The win-win financial measures from the banking sector will be prepared in a way that lowers interest rates for high-interest borrowers."