Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Soaring corporate loans feared to increase default risks
A promotional poster for a loan product is seen from the window of a commercial bank in Seoul. / Korea Times file
By Yi Whan-woo
By Yi Whan-woo
Businesses are borrowing more money over an extended relief program that allows pandemic-stricken firms to postpone loan payments, amid a sharp rise in raw material prices and higher production costs, according to financial market analysts Monday.
At the same time, the businesses face a bigger risk of default as the benchmark interest rate is rising fast. This means the combined amount of principal and interest on loans that they should pay back when the relief program ends is also increasing quickly.
The combined amount of corporate loans extended between January and May by the country's top five banks ― KB, Shinhan, Hana, Woori and NongHyup ― increased by 32.1 trillion to 668.6 trillion won ($533.5 billion) compared to the end of 2021, according to data provided by the banks.
In contrast, corporate loans extended by the banks increased by 24.4 trillion between January and May of 2021 compared to the end of 2020.
Bank of Korea (BOK) data showed corporate loans nationwide rose for four consecutive months as of April and amounted to 1,106 trillion won.
In particular, such loans rose by 12.1 trillion won in April, marking the second-fastest rate of increase since June 2009 when the BOK began to collect such data.
The BOK said the firms mainly took out loans to buy raw materials, pay wages and operate facilities.
“The firms are especially believed to be affected by the rise in commodity prices and have sought to supplement money they need through the loan relief program,” it explained.
A source at one commercial bank noted that the banking industry in general is “being aggressive in attracting corporate customers” this year as home loans are declining due to tightened regulations.
Concerning the loan relief program, the BOK and sources view the companies will be exposed to a higher risk of default than in the past when the borrowing rate was lower than now.
The BOK increased the key rate five times since August of 2021, including May 26 when it raised the benchmark rate by 25 basis points to 1.75 percent to fend off inflation.
BOK Governor Rhee Chang-yong said the financial burden will grow by 3 trillion won for households and 2.7 trillion won for businesses whenever base rate rises by a quarter percentage point.
“The country's path to normalize monetary policy can make repayments more difficult when external economic conditions grow worse,” Rhee said.
The problem could be more serious considering that about 77 percent of the borrowers between January and May were small- and medium-sized enterprises (SMEs) as well as micro business owners, which are less stable than larger firms in terms of finances.
Against this backdrop, the banking industry expects the loan relief program to terminate in September and are preparing to take measures to minimize the impact on corporate borrowers.
For instance, KB Kookmin Bank has introduced a repayment plan over a 10-year period, while Shinhan, Hana and Woori have come up with five-year repayment plans.