The number of small and medium-sized enterprises and self-employed individuals unable to repay bank loans is rapidly increasing as the war between the United States and Iran drags on and domestic demand continues to weaken. Some commercial banks have sounded the alarm as delinquent loan amounts surged by as much as 20% compared to the previous year. Market observers warn that SME and self-employed delinquency rates will inevitably rise for the time being due to heightened volatility in oil prices, exchange rates, and interest rates.
According to financial industry sources on the 14th, the simple average delinquency rate on SME loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup) stood at 0.67% as of the end of February this year, up 0.17 percentage points from the end of last year (0.50%). This is nearly three times higher than 2021 (0.23%), before interest rate hikes began in earnest. A senior executive at Bank A said, "SME delinquencies have been increasing sharply since the beginning of this year," adding that "delinquent loan amounts have risen by about 20% compared to a year ago."
Delinquency rates on loans to self-employed individuals are also climbing. The delinquency rate on self-employed loans at the five major commercial banks was 0.63% at the end of February, up 0.13 percentage points from the end of last year (0.50%). This represents more than a fourfold increase from the 0.15% level seen as recently as 2021.
The recent surge in loan delinquency rates is attributed to prolonged economic weakness caused by high interest rates and a strong dollar. While large export-oriented companies such as semiconductor makers have rebounded on artificial intelligence investment, domestic demand in sectors including construction, real estate, and food and beverage continues to deteriorate. According to the Korea Small Business Institute, the financing sentiment index for SMEs in January this year fell 6.4 points from the previous month to 75.5 points, indicating continued funding concerns.
Six out of ten SMEs are struggling to pay interest with their earnings. According to the Bank of Korea, the proportion of SMEs with an interest coverage ratio below 1 stood at 61.4% at the end of last year, up 4 percentage points from the previous year. Outstanding loans to vulnerable self-employed borrowers, including those with multiple debts and low incomes, also surged by more than 23 trillion won over the past three years to 114.6 trillion won.
Financial industry sources say managing delinquency rates has become more difficult as sales and disposals of non-performing loans have become harder. An official at a commercial bank explained, "As the high interest rate environment has extended following the retreat from rate cuts last year, interest burdens have increased and delinquency rates have been rising," adding that "this is not a problem in specific industries but a difficult situation for most SMEs and small business owners."
As delinquency rates expand rapidly, banks are hurrying to prepare countermeasures. Shinhan Bank has recently been compiling lists of SMEs eligible for financial support through relationship managers at each branch. The bank plans to provide interest reductions, deferred interest payments, and repayment moratoriums to help viable companies avoid default by getting through the difficult period. Support recipients are being selected based on criteria including sales and business partners.
KB Kookmin Bank has been managing asset quality indicators since last year to reduce delinquency and substandard loan ratios. Hana Bank is pursuing interest cashback programs for small business owners along with support for regional SMEs. Woori Bank is also continuously monitoring potential non-performing loans and managing borrowers at risk of default.
The concern is that delinquency rates are likely to rise further as international oil prices have surged following developments in the Middle East, while exchange rates and interest rates have also risen sharply. An analysis by the Bank of Korea of the correlation coefficient between oil price fluctuations and changes in manufacturing profitability found that SMEs (-0.78) are more vulnerable to oil price increases than large corporations (-0.69). This is because rising rubber and plastic prices primarily impact consumer-oriented industries where SMEs are concentrated.
The government's strong household loan management measures are also a factor dragging down domestic demand. If the real estate market contracts sharply, funding difficulties for small business owners and SMEs in related industries are expected to intensify.
A deputy president in charge of lending at a commercial bank emphasized, "Self-employed individuals are already struggling, and with the property market continuing to cool, loan delinquency rates will inevitably increase for the time being."
