Around 30 percent of the 58 trillion won ($46.3 billion) worth of bank loans to small- and medium-sized enterprises in South Korea may sour as the government ends Covid-19 relief funding and hikes interest rates.
According to the data submitted by the Financial Supervisory Service (FSS) on Sunday, 27 percent of the loans by Korea’s five major commercial banks KB Kookmin, Shinhan, Hana, NH Nonghyup, and Woori were to SMEs with an interest coverage ratio of less than 1 as of the end of 2020.
The interest coverage ratio, a key measure of a firm’s ability to service debt, is calculated by dividing a company’s operating profit by its interest expenses. A reading below 1 means that the firm’s earnings are not enough to cover the interest charges.
A total of 58.2 trillion won worth of loans may go delinquent according to the FSS data.
Although data for 2021 has not yet been released, the number of SMEs that received bank loans with an interest coverage ratio below 1 will most likely remain unchanged or even higher.
According to the Bank of Korea, the balance of bank loans to SMEs climbed from 804.6 trillion won at the end of 2020 to 886.4 trillion won at the end of 2021 and soared to 916.6 trillion won as of the end of April 2022.
The government’s Covid-19 relief funding is scheduled to end in September, raising concerns of a liquidity crunch for SMEs that took out loans from banks.
The Bank of Korea has also raised interest rates a total of five times from August last year to May, adding to SMEs’ financial burden.
“The government needs to come up with ways for companies to recover their competitiveness rather than simply providing financial assistance,” said Cho Kyung-yeop, head of economic research at the Korea Economic Research Institute.
By Kim Yoo-sin and Susan Lee
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