About 30% of the 58 trillion won ($46.3 billion) in bank loans to small and medium-sized businesses in South Korea could deteriorate as the government ends Covid-19 relief funding and raises interest rates. ‘interest.
According to data submitted by the Financial Monitoring Service (FSS) on Sunday, 27% of loans from Korea’s top five commercial banks KB Kookmin, Shinhan, Hana, NH Nonghyup and Woori were to SMEs with an interest coverage ratio below 1 at the end of 2020.
The interest coverage ratio, a key measure of a company’s ability to service its debt, is calculated by dividing a company’s operating profit by its interest expense. A reading of less than 1 means that the company’s profits are not enough to cover interest charges.
According to data from the FSS, a total of 58.2 trillion won in loans could be overdue.
Although data for 2021 has not yet been released, the number of SMEs that received bank loans with an interest coverage ratio below 1 will most likely remain unchanged or even higher.
According to the Bank of Korea, the balance of bank loans to SMEs increased from 804.6 trillion won at the end of 2020 to 886.4 trillion won at the end of 2021 and soared to 916.6 trillion won at the end of April 2022.
Government relief funding for Covid-19 is set to end in September, raising fears of a cash crunch for SMEs that have taken out loans from banks.
The Bank of Korea also raised interest rates a total of five times between August last year and May, adding to the financial burden on SMEs.
“The government needs to find ways for companies to regain their competitiveness rather than just providing financial assistance,” said Cho Kyung-yeop, head of economic research at the Korea Institute of Economic Research.
By Kim Yoo-sin and Susan Lee
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