Loans to small corporate borrowers fall for first time this year at Korea's 5 major banks

Outstanding loans to small and medium-sized corporate borrowers at Korea's five major commercial banks have declined for the first time this year, data showed Tuesday. The contraction is raising concerns that financially distressed companies — squeezed by weak domestic demand and high borrowing costs — are being cut off from credit, even as analysts note that banks are also deliberately tightening standards to protect their balance sheets.

The combined balance of small and medium-sized corporate loans at the five banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 357.76 trillion won ($232 billion) as of June 25, down from 358.54 trillion won the previous month. The outstanding balance, which excludes loans to sole proprietors and micro-businesses, had posted net growth every month since December before turning to a net decline this month.

The shift reflects banks' decision to channel new lending toward households and large corporations. The five banks' total corporate loan balance reached 872.44 trillion won, up 27.72 trillion won from the end of last year, but large-enterprise loans accounted for more than two-thirds of that increase, rising by 18.79 trillion won.

Banks have been reluctant to expand lending to smaller firms amid mounting uncertainty over repayment. According to the June issue of the KOSI SME Trends report published by the Korea Institute for Small and Medium Enterprises and Startups, the average lending rate on small and medium-sized enterprise loans at deposit-taking banks rose 0.01 percentage point from the previous month to 4.18 percent, adding to financial cost burdens. As funding costs climbed and repayment pressure intensified, the SME loan delinquency rate rose to 0.90 percent, up 0.09 percentage points from the prior month.

A Bank of Korea report on corporate management performance in 2025 found that companies with an interest coverage ratio below 100 percent — meaning they cannot cover interest expenses from operating income — accounted for 39.9 percent of all firms, the highest level since the data series began in 2013. Large enterprises made up just 5.8 percent of that group, while small and medium-sized enterprises accounted for 34.1 percent, underscoring how default risk is concentrated among smaller firms.

Bankers say the deteriorating risk profile of small corporate borrowers has left them with little capacity to seek out and support creditworthy smaller companies. "Identifying sound small businesses and providing them with financing is important, but the overall market environment is so difficult that we are cautious about extending loans readily," one banking industry official said. "Given market conditions, we have no choice but to apply rigorous loan screening as part of risk management."

The outlook offers little comfort. With pressure mounting for domestic benchmark interest rate increases and a recovery in consumer demand still delayed, banks are expected to entrench their conservative lending stance further. Focusing on blue-chip large corporations may help banks defend near-term asset quality indicators, but analysts warn that a wave of small business failures over the medium to long term could amplify latent risks across the broader financial system.

Kim Jeong-sik, a professor of economics at Yonsei University, said the underlying weakness is being obscured by misleading signals. "A current-account surplus and a partial boom in the semiconductor sector have created an optical illusion that masks a broader deterioration in industrial competitiveness," he said. "Because many small and medium-sized enterprises depend on domestic demand, worsening earnings and rising closures are likely freezing both loan demand and supply at the same time."

The Korea Exchange will hold KOSDAQ CONNECT 2026 — the Kosdaq market's largest investor relations event — from Wednesday through Friday to mark the 30th anniversary of the Kosdaq market's launch, spotlighting policies to revitalize the exchange and remove underperforming companies.