Yields on small and medium enterprise financial bonds (SME bonds) issued by IBK Industrial Bank of Korea to fund lending operations are climbing as the war between the United States and Iran drags on. Market observers warn that the one-year SME bond yield has surpassed 3%, potentially driving up loan rates for small and mid-sized businesses.
According to financial industry sources on the 25th, the one-year maturity rate on IBK's "IBK Compound Interest Account (SME bond)" product currently sold at bank branches stands at 3.03% per annum. The rate on the product was 2.59% at the end of June last year but rose to 2.84% by year-end. The two-year and three-year maturity rates currently stand at 3.42%.
The market-to-market yield on SME bonds in the bond market also crossed 3%, reaching 3.051% as of the 24th. That is the highest level in one year and four months since November 28, 2024 (3.054%). According to IBK Industrial Bank, the new issuance rate for one-year AAA-rated SME bonds stood at 2.83% as of the 17th. The upward trend is clear compared with the 2.4% range recorded in June last year.
IBK Industrial Bank funds 59% of its total deposits through SME bonds, a structurally different model from commercial banks that rely on deposits. The share of SME bond funding has risen every year, from 54.5% at the end of 2022 to 58.7% at the end of last year. SME bonds also account for 73% of outstanding SME loans as of the end of February. This means the impact of rising market interest rates hits the bank more directly.
Industry officials say that when yields on SME bonds — a key funding instrument — jump, upward pressure on lending rates is inevitable. They note that Shin Hyun-song, head of the Monetary and Economic Department at the Bank for International Settlements (BIS) and nominee for the next Bank of Korea governor, is considered relatively hawkish. Combined with the government's push for a 25 trillion won supplementary budget, bond yields are likely to face continued pressure. This suggests SME bond yields could remain elevated for some time.
The question is whether small businesses and micro-enterprises can withstand these rising financial costs. As domestic and external uncertainties have worsened business conditions, IBK Industrial Bank's delinquency rate reached 1.00% as of the end of September last year — the highest since 1.02% at the end of March 2009, during the global financial crisis. While the government has emphasized expanding productive and inclusive finance, some observers point out that the rise in bond yields could become a complicating factor in pursuing those policy goals.
IBK Industrial Bank itself stated in its "2025 Business Report" disclosed this month, "SME bonds accounted for 43% of total funding including foreign currency last year, meaning IBK has a different funding structure from ordinary commercial banks." The bank added, "With the recently erupted U.S.-Iran war amplifying uncertainty, there are concerns that expanded international oil price volatility and supply chain disruptions could act as risk factors."
