Korean SMEs at risk of bankruptcy rise to pre-pandemic levels

[Photo by Kim Ho-young]

The number of small and medium enterprises at risk of insolvency in South Korea is set to return to the pre-pandemic levels as government subsidy and bank loan maturity extension programs to help companies survive through Covid-19 restrictions are due to end soon.

The number of Korean SMEs at risk of insolvency increased by 25 from the previous year to 185 in 2022, according to results of regular credit risk assessment released by the Financial Supervisory Service on Monday. This is the highest since 2019, when those companies reached 210, and is close to 190 in pre-pandemic years.

A company with signs of insolvency refers to a business that has received a C or D grade in the credit risk assessment conducted regularly by creditor banks once a year in accordance with the Corporate Restructuring Promotion Act.

Their ability to repay loans could be significantly lowered without external support, such as Covid-19 subsidies and loan maturity extensions.

Creditor banks increased the number of target companies subject to assessment by 215 from 3,373 last year to 3,588 this year, considering that no more external funding and an economic downturn could bring insolvency to them.

The number of D-graded companies with a low possibility of business normalization increased to 101 this year from 81 in 2021. These companies face even greater challenges next year because of the impact of multiple challenges, including rising borrowing costs and the prolonged war in Ukraine. Worse, the grace period for loan repayment for companies affected by the pandemic will expire in September next year.

The delinquency rate of domestic banks’ corporate loans hit a record low of 0.22 percent at end-June this year, before bouncing back by 0.04 percentage point to 0.26 percent at end-October.

In particular, the delinquency rate on SME loans grew 0.06 percentage point from 0.24 percent to 0.30 percent during the same period, showing an increasing trend on the time series curve.

The FSS said it has a tailored financial support plan for these companies in cooperation with the government and the financial sector. For example, for C-graded companies that apply for a workout, business normalization will be sought through financial support from creditors on the premise that the company will make self-rescue efforts.

In addition to financial support, the FSS plans to increase policy efficiency by simultaneously providing non-financial support such as business restructuring and consulting.