South Korea’s Marginal Companies on the Rise Amid ‌Sluggish Domestic Demand

The number⁢ of‍ marginal companies in South Korea‌ that cannot even pay interest⁤ has increased significantly, sparking concerns⁤ about‌ the soundness of‌ financial institutions. According to the Bank‍ of Korea’s ‘Financial Stability Report’, the proportion of​ marginal‌ companies whose interest coverage ratio fell below 1 for three consecutive ​years ‍was 16.4% ​at the end of last year.

By company size, large corporations saw a 12.5% increase in marginal companies, while small and medium-sized enterprises experienced a 17.4% rise. The amount of borrowings of ⁣these marginal​ companies also increased by 26%, with large corporations increasing by 23.3% and small and medium-sized enterprises by 31.9%.

By industry, the accommodation and food service sectors⁢ were hit the hardest, with 59%⁣ of companies classified‌ as marginal. The transportation, electricity and‍ gas, and real estate industries were also⁣ found to be vulnerable, with 49.2%, ⁢46.1%, and ​43.8% of⁢ companies, respectively, classified as marginal. ⁣In contrast, the aviation ‌and petrochemicals industries had relatively low proportions⁣ of marginal ⁣companies, at 0.2% and 4.1%, respectively.

The rise in marginal companies has put the soundness of financial institutions‌ on high alert. At​ the end of last year,⁢ the credit extension ratio of deposit-taking institutions to marginal companies reached ⁣8.5%. The credit extension ratio of‍ banks to ⁢marginal companies rose 2.4 percentage points year-on-year to 10%, while mutual finance and savings ⁣banks⁣ saw increases of 1​ percentage point and​ 2.5 percentage ‍points, respectively.

Marginal companies have been found to have lower asset ‌operating​ profit⁢ ratios and current ratios compared⁤ to normal companies. They also tend to have ‌higher interest rates and borrow more than normal companies, increasing their risk ⁤of insolvency. A⁣ Bank of Korea official⁣ emphasized the need for‍ financial institutions to ⁢exercise caution ‍and implement preemptive risk management to prevent marginal companies from continuing to exist for an ⁢extended period ⁢and‍ lowering the asset ‌soundness⁢ of financial institutions.

Financial institutions need to be careful in selecting companies with high signs of⁤ being marginal companies and⁣ take proactive⁢ measures⁣ to mitigate potential risks. This includes ‌closely monitoring the‌ financial⁣ health of​ marginal companies and taking steps to prevent them from accumulating excessive debt.