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.