SME, small-business bad debt tops W3.4tr over 5 years — 98% unrecovered

Bad debt accumulated by public institutions under the Ministry of SMEs and Startups — stemming from loans and guarantees extended to small and medium-sized enterprises and small business owners that have become difficult to recover — reached nearly 3.4 trillion won ($2.41 billion) over the past five years. Of that amount, only 68.7 billion won was recovered during the same period, a rate of just 2 percent.

According to data obtained from Korea Asset Management Corp. (Kamco) by Rep. Park Sung-min of the People Power Party, a member of the National Assembly's Trade, Industry, Energy, SMEs and Startups Committee, the total bad debt acquired by Kamco from the Korea Technology Finance Corp. (Kibo), the Small Enterprise and Market Service (Semas) and the Korea SMEs and Startups Agency between 2021 and last year came to 3.3967 trillion won.

Last year's bad debt figure stood at 754.2 billion won, up 23.4 percent from 611.1 billion won in 2024. After declining in the years following COVID-19, bad debt has begun rising again. The combined bad debt acquired by Kamco from the three institutions fell from 961.9 billion won in 2021 to 621.4 billion won in 2022 and 448.1 billion won in 2023, before rebounding to 611.1 billion won in 2024 and climbing further to 754.2 billion won last year.

Kamco acquires bad debt and works to restructure and recover it. The agency primarily targets loans and payment guarantees that have not been repaid as scheduled and are unlikely to be recovered. After acquiring the debt, Kamco offers restructuring options — including principal and interest reductions and installment repayment plans — based on each debtor's ability to repay.

By institution, Kibo recorded the largest share of cumulative bad debt over the five-year period at 2.01 trillion won. The Korea SMEs and Startups Agency followed with 1.06 trillion won, and Semas came in at 326.9 billion won. Kamco began acquiring bad debt from Semas only in 2024.

The trend appears to reflect worsening financial conditions and loan repayment capacity among small and medium-sized enterprises amid a prolonged economic downturn, driving a rise in guarantee defaults. The outlook for this year is no brighter. Kamco plans to acquire bad debt from Ministry of SMEs and Startups-affiliated public institutions in the fourth quarter. With the SME loan delinquency rate hitting 1.0 percent in May — its highest level in 11 years, according to the Financial Supervisory Service — the volume of bad debt Kamco takes on this year could grow even further.

The surge in bad debt from Semas was particularly striking. Bad debt acquired by Kamco from Semas jumped 80.8 percent, from 116.4 billion won in 2024 to 210.5 billion won last year. The increase is largely attributed to repayment deadlines arriving in quick succession for emergency loans and policy funds disbursed on a large scale to small business owners struggling during the COVID-19 pandemic. The risk grows further when borrowers shut down their businesses or dissolve their companies, making debt recovery increasingly difficult.

The recovery rate on bad debt acquired over the five-year period remained at roughly 2 percent. The cumulative amount recovered from Kibo, Semas and the Korea SMEs and Startups Agency between 2021 and last year totaled 68.7 billion won — about 2.0 percent of the 3.4 trillion won acquired during the same period. The annual recovery rate across the three institutions hovered around the 2 percent mark each year: 1.1 percent in 2021, 2.2 percent in 2022, 3.2 percent in 2023, 2.3 percent in 2024 and 2.1 percent last year. Last year alone, the total recovered from the three institutions came to 16 billion won, or 2.1 percent of the 754.2 billion won acquired. By institution, the recovery rate was 3.4 percent for Kibo, 1.5 percent for the Korea SMEs and Startups Agency and 0.2 percent for Semas.

Bad debt also rose at the Korea Credit Guarantee Fund, which operates under the Financial Services Commission and provides guarantees to small and medium-sized enterprises and the self-employed. Bad debt acquired by Kamco from the fund last year reached 831.1 billion won, up 66.5 percent from 499.1 billion won the previous year. The amount recovered last year was 22.9 billion won, a recovery rate of 2.8 percent.

As the repayment capacity of small and medium-sized enterprises and small business owners deteriorates, calls are growing for stronger oversight of policy lending. Efforts to prevent bad debt must be paired with support for viable businesses seeking to recover. "Even accounting for the nature of policy finance, a recovery rate stuck in the 2 percent range is a serious problem," Rep. Park said. "Rather than simply supplying funds, we need to detect early warning signs of financial distress and strengthen both recovery support and debt management at the same time."