Korean SMEs struggle as average loan interest surpasses 6% in March

[Image source: Gettyimagesbank]

South Korea’s small and mid-size companies are struggling to stay afloat as high interest rates are raising the cost of funding and worsening their balance sheets.

According to an analysis by Maeil Business Newspaper on the loan interest data provided by the Korea Federation of Banks on Sunday, credit loans were extended by the country’s top six commercial lenders to small and mid-size enterprises (SMEs) at an average interest rate of 6.39 percent at the end of March, up from 4.19 percent in March 2021.

The analysis showed that the average rate on entire loans including secured loans given to the SMEs jumped to 5.67 percent in January this year from 3.37 percent in December 2021.

Higher loan rates are raising the cost of funding at SMEs.

An SME that manufacturers automobile components, for example, is on alert as it needs to renew its loan at the end of next month. It received loans at a rate of low 3 percent range last year but it will have to renew the loans at double the rate now. The company, which generates about 3 billion won ($2.3 million) in sales, will have to spend double the cost to pay for the interest that stayed at about 200 billion won annually.

The Korean government has decided to provide policy funds to SMEs worth 80 trillion won this year but the companies are calling for more measures to boost synergy in the effect. They are asking for the government to ease interest burden, expand loan limits and defer maturity repayment.

Data from the Bank of Korea showed the amount of new loans with an interest rate of more than 5 percent accounted for 28.8 percent of the entire loans last year, the highest in nine years since reaching 38 percent in 2013.

Industry insiders note that SMEs are hoping to carry out new investments this year to recover from the pandemic but the high interest rate environment is pulling them back.