SME loan delinquency rate hits 10-year high as export profitability concerns mount

Warning signs are flashing over the financial health of South Korea's small and medium-sized enterprises, which have been struggling against high interest rates, rising raw material costs and sluggish domestic demand. The delinquency rate on SME loans climbed in June from a year earlier, with the rate for incorporated SMEs reaching its highest level in a decade. Adding to the pressure, the won-dollar exchange rate — which briefly topped 1,500 won earlier this year — has fallen sharply into the 1,300-won range, raising concerns that export profitability could deteriorate for small exporters.

According to the Financial Supervisory Service, the delinquency rate on won-denominated loans at domestic banks stood at 0.56% at the end of June, up 0.04 percentage points from 0.52% in the same month last year. For the month of June, that is the highest reading since 0.71% in 2016 — a 10-year high. The burden was particularly acute for SMEs: their loan delinquency rate rose 0.08 percentage points to 0.82%, from 0.74% in June last year. In May, the rate surged to 1.00%, the highest in 11 years.

The situation is worse for incorporated SMEs. Their delinquency rate jumped 0.13 percentage points to 0.92% in June, up from 0.79% in June last year — the highest June reading since 0.94% in 2016. The delinquency rate for self-employed borrowers also rose over the same period, from 0.66% to 0.69%.

Business conditions on the ground are equally grim. A Korea Federation of SMEs survey of 500 small and medium-sized enterprises — excluding micro-businesses — found that 37.0% expected the business environment in the second half of this year to worsen compared with the first half, while only 12.8% expected improvement. Although the share expecting deterioration fell 11.4 percentage points from the first-half survey and the share expecting improvement rose 5.4 percentage points, companies forecasting a worsening still outnumber those expecting a recovery by nearly three to one.

The SME Business Survey Index for August also remained weak at 80.0, up 1.8 points from the previous month but still well below the baseline of 100. Manufacturing fell 2.4 points to 80.1 from 82.5 the previous month, contrasting with non-manufacturing, which rose 3.7 points to 80.0. Cost pressures remain persistent.

In the Korea Federation of SMEs survey, SMEs cited rising raw material prices (27.6%) as their top domestic business challenge for the second half of this year, followed by weak domestic demand (18.5%), rising labor costs (14.5%) and labor shortages (8.5%). On the external side, rising overseas raw material prices (23.6%) topped the list of foreign business challenges, followed by increased exchange rate volatility (16.9%).

As financial conditions tighten, demand for policy support is shifting toward financing. The same survey found that managing business risk — including exposure to exchange rate and tariff risk — was the top second-half management priority, cited by 28.2% of SMEs. Among policies needed to revitalize SMEs, financial support (18.8%) ranked second, behind tax burden relief (19.9%).

For exporters, the sharp drop in the exchange rate has emerged as a new variable. The won-dollar rate closed Friday's session in the Seoul foreign exchange market at 1,386.5 won, down 6.1 won from the previous trading day — its lowest level in roughly 11 months since Sept. 17 last year. Given that the monthly average rate exceeded 1,520 won as recently as June, the won has strengthened sharply in just over two months.

Exporters that receive payment in dollars but pay wages and fixed costs in won see both sales and profit shrink when converted to local currency. Small and mid-sized exporters have more limited access to currency-hedging tools than large companies, making profitability management particularly difficult when the exchange rate moves sharply in a short period.

In practice, SMEs view exchange rate volatility itself — rather than the direction of movement — as the primary risk. In the Korea Federation of SMEs survey, increased exchange rate volatility ranked as the second most-cited external business challenge, behind rising overseas raw material prices. Managing exchange rate and tariff risk topping the list of second-half priorities reflects the same concern.

Mid-sized companies with high export exposure share similar worries. In a survey of 250 mid-sized exporters across major export sectors, conducted by the Korea Middle Market Enterprise Federation, 56.0% expected their exports in the second half to increase from the same period last year. However, 47.3% identified greater exchange rate volatility as the top factor that could hurt exports, followed by rising costs for raw materials and labor (36.4%) and higher logistics costs (30.9%).