1 in 5 SMEs faced loan default risk in past year, delinquency rate hits 11-year high

One in five small and medium-sized enterprises and small business owners experienced a loan repayment crisis in the past year, a new survey shows. One in four said they are currently struggling under the weight of debt, and some said they could not hold on for even six more months. Analysts say the prolonged economic downturn and weak domestic demand are pushing SMEs' financial difficulties to a breaking point.

A survey released Tuesday by the Korea Federation of SMEs, which polled 500 companies carrying outstanding loans, found that 1.8 percent of respondents had actually missed a principal or interest payment in the past year. A far larger share — 20 percent — said they had not defaulted but had faced a repayment crisis, meaning one in five small businesses came close to the edge.

Another 26.4 percent said they currently find their debt burden difficult to manage. The strain was heavier among smaller firms: 28.1 percent of micro-enterprises and self-employed business owners reported feeling burdened by debt, compared with 21.1 percent of mid-sized SMEs — a gap of 7 percentage points. Among companies with annual sales of 1.5 billion won ($1.02 million) or less, the share reporting debt distress was highest at 28.9 percent, and 3.3 percent had actually experienced a delinquency.

The survival runway for many firms is shrinking fast. Among companies already feeling burdened by debt, 23.5 percent said they could hold out for less than a year if current conditions continue, and 6.8 percent said they could not last even six months. Micro-enterprises and self-employed owners were far more vulnerable: 27.4 percent said they had less than a year of runway, nearly four times the 7.7 percent recorded among mid-sized SMEs.

The biggest factor driving up debt burdens was falling sales and deteriorating operating profit, cited by 67.4 percent of respondents, followed by high loan interest rates (37.9 percent), rising raw material prices (34.8 percent) and higher labor costs (25 percent). With revenue shrinking due to weak domestic demand and financing costs mounting, repayment capacity is eroding.

Companies are cutting investment and payroll to stay afloat. The most common response to debt pressure was reducing costs through investment cuts and workforce reductions, cited by 58.3 percent. But 22 percent said they had no viable response at all — a figure that climbed to 25.5 percent among micro-enterprises and self-employed owners, more than three times the 7.7 percent among mid-sized SMEs, and reached 31 percent among firms with annual sales of 1.5 billion won or less.

The survey findings are borne out by financial sector data. The Financial Supervisory Service recently disclosed that the delinquency rate on SME loans across all domestic banks stood at 1.0 percent as of the end of May, the highest since May 2015 (1.11 percent) — an 11-year peak. The rate rose 0.1 percentage point from the end of the prior month (0.9 percent).

Breaking down the figures, the delinquency rate on loans to small incorporated companies rose 0.13 percentage point from the prior month to 1.11 percent, while the rate for sole proprietors climbed 0.06 percentage point to 0.84 percent, reflecting broad deterioration in SME credit quality.

The average SME loan delinquency rate at the four major banks — KB Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank — reached 0.55 percent in the second quarter of this year, the highest since the first quarter of 2017 (0.59 percent). Among the four, Woori Bank posted the highest rate at 0.75 percent, followed by Hana Bank (0.59 percent), Shinhan Bank (0.49 percent) and KB Kookmin Bank (0.37 percent).

Loans that banks have in effect written off as unrecoverable are also piling up. The four major financial groups' estimated loss provisions at the end of the second quarter reached 2.99 trillion won, approaching the 3 trillion won mark. Analysts say the delayed economic recovery is impairing companies' ability to repay debt and weighing on the financial sector's overall health.

Experts say comprehensive measures are needed to ease the financial burden on small businesses. Lee Min-kyung, head of policy coordination at the Korea Federation of SMEs, said that since falling sales and deteriorating operating profit are the primary drivers of debt distress, boosting domestic demand and stimulating the economy in the second half of the year is critical to restoring SMEs' repayment capacity. "Given that a benchmark interest rate hike could further increase financing costs, it is also necessary to pursue policy finance expansion alongside cooperative financial measures from banks — such as loan maturity extensions and repayment deferrals," she said.