The self-employed and small and medium-sized enterprises (SMEs) are deeply troubled by the increase in the base rate. As the rising trend of corporate loan interest rates is inevitable in the future, there is growing concern that the interest burden on SMEs and small business owners will increase.
According to the financial industry on the 27th, the Bank of Korea raised the base interest rate by 0.25 percentage points from 0.75% to 1% on the 26th, signaling the end of the era of ‘zero interest rates’ after 1 year and 8 months. In addition, it strongly hinted at an additional rate hike early next year.
As the base rate rises, banks are expected to raise lending rates in the near future. According to the financial industry, the interest rates on self-employed loans at major commercial banks have risen by up to 1 percentage point since the base rate hike in August.
In the ‘Weighted Average Interest Rate for Financial Institutions in October’ this year announced by the Bank of Korea the day before, the corporate loan interest rate was 2.94%, up 0.06 percentage points from the previous month.
The interest rate on loans to large corporations rose 0.03 percentage points from the previous month to 2.67%, while the interest rate on loans to small and medium enterprises rose 0.09 percentage points to 3.14%. As interest rates on both corporate and household loans rose, the average interest rate for total loans to households and businesses rose 0.11 percentage point from the previous month to 3.07 percent.
The impact of the increase in loan interest rates is expected to have a greater impact on small and medium-sized enterprises (SMEs) with relatively weak capital and high dependence on borrowing than large enterprises. As the sales of small and medium-sized enterprises (SMEs) and the self-employed continue to suffer due to COVID-19, if the burden of financial costs increases, it is highly likely to face a liquidity crisis.
According to the Bank of Korea, as of the end of October, corporate loans from banks stood at 1059.3 trillion won, up 10.3 trillion won from the end of the previous month. It is the largest increase since 2004, when statistics began to be compiled based on the increase in October. The increase in corporate lending recorded the highest record for five consecutive months since June as of the same month.
In particular, it was the small and medium-sized enterprises (SMEs) that were hit hard by the COVID-19 crisis that drove the entire corporate loan. Loans to SMEs increased by 8 trillion won to 881 trillion won. Loans for individual businesses borrowed mainly by the self-employed also increased by 2.6 trillion won. As of October, loans to small and medium-sized enterprises (SMEs) increased by the second largest amount after the preparation of related statistics.
According to the research service results recently released by the Korea Federation of Small and Medium Businesses, if the base interest rate rises by 1 percentage point, the interest expense compared to the operating profit borne by SMEs rises by 8.45 percentage points. Small and medium-sized enterprises (SMEs) spend about 63% of their operating profit based on last year’s sample as interest expenses.
Yang Chan-hoe, head of the KBIZ Small and Medium Business Research Center at the Korea Federation of SMEs and SMEs, said, “At this point, the increase in the base rate is expected to increase the burden of interest costs on SMEs. In addition, policy funding support such as additional credit guarantees are needed for companies with a high possibility of revitalization.”
Ji-eon Lee, Senior Research Fellow at the Korea Institute of Finance, said, “Although the banking sector has maintained a fairly high level of corporate credit soundness so far, loans to SMEs with low credit ratings have surged over the past few years, and at the same time, risks in these industries have risen sharply. did,” he pointed out.
“In the case of interest rates, it is not expected that the rate will rise sharply due to concerns about an economic slowdown, but once it rises, it will increase the marginal difference and worsen soundness,” he said.
In fact, the ‘marginal company’ that has not been able to pay off even interest since Corona 19 is recording the largest ever. According to the BOK, the proportion of marginal enterprises last year was 40.9%, up 4.3 percentage points from a year ago (36.6%). This is the highest record since the compilation of related statistics in 2009.
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