Small and medium-sized enterprises (SMEs) are increasingly failing to repay debts on time as international oil prices surge and the won's exchange rate and raw material costs climb sharply. According to the Financial Supervisory Service (FSS), the won-denominated loan delinquency rate at domestic banks (based on principal and interest overdue for at least one month) stood at 0.62% in February, up 0.06 percentage point from the end of the previous month and reaching a nine-month high. On a same-month basis, it is the highest level in 10 years. Lending conditions for large corporations and households have also deteriorated, but the most concerning development is that the delinquency rate for small and medium-sized corporations reached 1.02%, crossing the critical 1% threshold that signals crisis and emerging as a hidden risk factor amplifying economic instability.
The delinquency rate for SMEs, including both small and medium-sized corporations and individual business owners, stood at 0.92%. Looking at small and medium-sized corporations alone, the rate jumped 0.14 percentage point from the previous month, the sharpest deterioration among all sectors. The delinquency rate for small and medium-sized corporations was only 0.76% two years ago, but has continued to rise since then, with the upward trend accelerating recently. These companies appear to be bearing the full brunt of soaring material and labor costs, compounded by a surging won-dollar exchange rate.
The cash crunch facing SMEs is evident in various indicators. Corporate loan balances at Korea's top five banks rose by 15 trillion won in the first three months of this year, three times the increase recorded during the same period last year. Loans to SMEs in particular rose by 6.3 trillion won, six times the increase from a year earlier. This means more companies are borrowing to stay afloat. In the first two months of this year, 372 companies went bankrupt after failing to settle bills and other payments, a 32.4% increase from the same period last year.
The bigger problem is that the risk of rapidly expanding management difficulties at SMEs has grown as supply chain disruptions and raw material cost pressures have intensified following the Iran war. Distress at SMEs, the backbone of the economy, can weaken industrial competitiveness and lead to deteriorating bank soundness and a real economy downturn. This is why the government and financial sector must strengthen preemptive monitoring and actively work to secure soundness in response to expanding risks. Refined support measures should be prepared for companies experiencing temporary cash shortages, and exporters should receive additional trade financing support and assistance in diversifying export markets. However, bold restructuring measures such as disposing of non-performing loans are needed for zombie companies with little prospect of recovery. Before SMEs, the lifeblood of industry, are pushed into a deeper quagmire, both regulators and the financial sector must respond with extraordinary resolve.
