SME loan delinquency rate hits 11-year high as financing strains deepen

A corporate customer service counter at a bank branch in Seoul. [Yonhap]

The financing crunch facing South Korea's small and medium-sized enterprises is intensifying. The delinquency rate on bank loans to SMEs has surged to its highest level in 11 years, and one in five small businesses reported coming close to defaulting on principal and interest payments over the past year. Exports — led by cosmetics and semiconductors — have continued to post double-digit growth, but manufacturing output has yet to escape a downward trend, suggesting the benefits of any economic recovery have not reached businesses on the ground.

Delinquency rate surges as SME financing strains mount

According to the "KOSI SME Trends — July 2026" report released Thursday by the Korea SME and Startups Institute (KOSI), the delinquency rate on SME loans at deposit-taking banks stood at 1 percent at the end of May, up 0.1 percentage point from the previous month. That is the highest level since May 2015, when the rate was 1.11 percent. The rate has climbed every month this year, rising from 0.81 percent in March to 0.90 percent in April before reaching 1 percent in May.

Breaking down the figures, the delinquency rate on loans to small incorporated companies rose 0.13 percentage point to 1.11 percent, while the rate for sole proprietors climbed 0.06 percentage point to 0.84 percent, pointing to a broad deterioration in financial health across the SME sector.

Delinquency rates at major commercial banks are also rising. The average rate for SME loans at KB Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank reached 0.55 percent in the second quarter — the highest since the first quarter of 2017, when it stood at 0.59 percent. Among the four lenders, Woori Bank posted the highest rate at 0.75 percent, followed by Hana Bank at 0.59 percent, Shinhan Bank at 0.49 percent and KB Kookmin Bank at 0.37 percent.

Rising loan interest rates have added to the financial burden. According to KOSI, the average interest rate on SME loans climbed to 4.38 percent in June, up 0.23 percentage point from the month before.

Manufacturing output has also continued to weaken. KOSI data show that production at small manufacturing firms fell 3.7 percent in May from a year earlier, dragged down by fewer working days — 20.5 this year compared with 21.5 last year — and output declines concentrated in the automotive and petroleum refining sectors. SME exports, by contrast, reached $33.91 billion in the second quarter, up 12.7 percent from the same period last year. Strong overseas demand for cosmetics and semiconductors drove the growth despite the reduction in working days.

KOSI said policy support is needed to ease cost and financing pressures as the decline in small manufacturers' output persists. A KOSI official said rising consumer and producer prices, combined with higher delinquency rates, are compounding the financial strain on small businesses.

One in five SMEs has faced a near-default crisis

The picture emerging from surveys of businesses on the ground is equally grim. In a recent poll of 500 companies with outstanding loans conducted by the Korea Federation of SMEs, 1.8 percent said they had actually fallen behind on principal or interest payments over the past year, but a further 20 percent said they had narrowly avoided a default — meaning one in five small businesses had experienced a repayment crisis. An additional 26.4 percent said their current debt burden was a source of financial strain.

The leading cause of that debt burden was declining sales and deteriorating operating profit, cited by 67.4 percent of respondents. High loan interest rates came second at 37.9 percent, followed by rising raw material prices at 34.8 percent and higher labor costs at 25 percent. With domestic demand slowing and revenue falling, the added weight of financing costs is eroding businesses' ability to service their debts.

The capacity of businesses to survive is also deteriorating rapidly. Among companies that said they felt burdened by debt, 23.5 percent said they could hold out for less than a year if current conditions continued, and 6.8 percent said they could not last even six months. Micro-enterprises and small merchants were particularly hard hit: 27.4 percent of that group said they could survive less than a year, roughly four times the 7.7 percent recorded among medium-sized firms, underscoring how the financial strain grows more serious the smaller the business.

SME industry groups called for support measures to ease financing costs. Lee Min-gyeong, head of policy coordination at the Korea Federation of SMEs, said that because the biggest drivers of debt stress are falling sales and weaker operating profit, it is critical to strengthen SMEs' and small merchants' repayment capacity through a second-half recovery in domestic demand and economic stimulus. She added that expanding policy finance and pursuing cooperative financial measures — including loan maturity extensions and repayment deferrals — should also be pursued in tandem.

boo@heraldcorp.com