25. Korea

In the course of responding to the COVID-19 crisis, SME loans increased significantly. From 2015 to 2019, the average annual increase in new SME loans was about KRW 46.5 trillion, but from 2019 to 2020, SME loans increased by about KRW 89.6 trillion. During the same period, loans to large corporations also showed a steep increase; thus, the share of SME outstanding loans decreased slightly.

Short-term loans as a share of total loans steadily declined between 2007 (75%) and 2018 (50%). However, since 2018, the proportion of short-term loans has shown a slight upward trend. As real estate prices rose from 2019, the value of collateral held by companies increased. As a result, additional collateral loan capacity was created. However, since facility loan only occurs when new facilities are purchased or built, short-term working capital loans have increased instead.

The government has also actively provided support to respond to the COVID-19 crisis, resulting in a sharp increase in the amount of loans covered by government guarantees compared to the past. While from 2015 to 2019 the increase in government-guaranteed loans averaged only about KRW 2 trillion per year, from 2019 to 2020 they increased by about KRW 11.2 trillion. This is more than five times the average annual increase in the past. The total amount of corporate loans also increased sharply during the same period, so the ratio of government-guaranteed loans to total loans did not increase significantly.

Looking at direct government loans, figures from 2020 also show a steep increase. From 2015 to 2019, the growth rate of direct government loans was only about KRW 0.1 trillion per year on average, while it was about KRW 1.9 trillion from 2019 to 2020. This is more than 10 times the average annual increase in the past.

The trend in the ratio of non-performing loans among all corporate loans continues to decline. Similarly, the share of non-performing loans in total SME loans has also declined. In particular, non-performing loans also dropped in 2020, when the supply shock and demand shock of the economy continued due to COVID-19 pandemic. The reason behind this decline is not a recovery of companies’ sales or profits, but rather because a loan principal and interest repayment deferral policy has been implemented.

Interest rates on corporate loans fell sharply in 2020. This is due to accommodative monetary policy to respond to the economic shock caused by COVID-19, rather than a decline in corporate default rates. The Bank of Korea's base interest rate, which was 1.75% at the end of 2018, fell to 0.5% in mid-2020, when the Republic of Korea was directly hit by the COVID-19 pandemic.

As new start-up activities contracted due to the COVID-19 outbreak, the growth rate of venture and growth capital was greatly reduced. While in 2018, venture and growth capital registered a growth rate of about 44%, in 2019 the growth rate was approximately 25%; in 2020 the growth in venture and growth capital registered a steep decline, with only 0.6% y-o-y growth.

As of 2018, the total number of companies existing in Korea was approximately 6,644,000, and the number of SMEs was approximately 6,638,000. As a result, SMEs account for 99.9% of all companies. On the other hand, the number of employees working in all Korean companies is about 20.6 million, of which the total number of employees working in SMEs is about 17.1 million. Therefore, 83.1% of all employed people are employed in small and medium-sized enterprises (SMEs). In terms of sales, the total sales of all companies is about KRW 549 billion. Among them, the total sales of SMEs is about KRW 266 billion, meaning that about 48.5% of the total sales are generated by SMEs.

COVID-19 has caused a sharp increase in the total amount of corporate loans. In particular, the total amount of corporate loans in 2020 increased by about KRW 114 trillion compared to 2019. From 2015 to 2019, the average annual increase in the total amount of corporate loans was about KRW 37.6 trillion. Therefore, it means that the total amount of corporate loans in 2020 compared to 2019 increased more than three times faster.

During the same period, the total amount of SME loans increased by about KRW 89.6 trillion, which is nearly 1.9 times higher than the average annual growth rate of SME loans from 2015 to 2019.

Corporate loans increased significantly for both large companies and SMEs. In the case of large enterprises, the total amount of loans to large enterprises increased by about KRW 24.4 trillion in 2020 compared to 2019. The increase in loans to large corporations as well as SMEs is a very unusual phenomenon considering the fact that the total loans to large corporations decreased by about KRW 0.5 trillion and KRW 1.5 trillion, respectively, in 2018 compared to 2017 and 2019 compared to 2018. Large corporations usually raise funds directly from the market by printing corporate bonds as it is more cost-effective than bank loans. However, in 2020, the corporate bond market contracted in the aftermath of COVID-19, making it difficult to raise funds. Many companies were trying to secure emergency funds in a future economic slowdown. For this reason, large corporations took out loans using the limit loans that were previously open.

The increase in loans to SMEs is mainly due to the deterioration of the industry due to the spread of COVID-19, and the increase in loans to large enterprises is mainly attributed to precautionary efforts to secure liquidity to prepare for uncertainty.

Meanwhile, this rapid increase in the total amount of loans was possible due to the active supply of funds from banks in accordance with government policy.

Since 2015, the proportion of non-performing loans in total loans has steadily declined. The ratio of non-performing loans, which reached about 3.7% in 2015, steadily declined to 1.45% in 2019. The decline in non-performing loans through 2019 meant that the lending market became more efficient. However, the fact that the proportion of non-performing loans has decreased significantly even in a situation where most large corporations and SMEs are taking a big hit in sales and profits due to COVID-19 is greatly influenced by the policy of deferment of principal and interest repayment of loans.

From April 2020, the Republic of Korea has implemented measures to extend loan principal maturity and defer repayment of principal and interest for SMEs and small businesses affected by COVID-19 in all financial sectors. This policy is still ongoing as of October 2021. This policy is discussed in more detail in the government policy response section below.

Compared to 2019, interest rates on loans to small and medium-sized enterprises (SMEs) and large corporations both fell sharply in 2020. This is mainly due to the Bank of Korea's accommodative monetary policy in response to COVID-19. The Bank of Korea's base interest rate, which was 1.75% as of the end of 2018, fell to 0.5% in mid-2020, when the Republic of Korea was directly hit by the COVID-19. Then, in August 2021, the Bank of Korea decided to raise the base rate by 25bp, and as of October 2021, the base rate remains at 0.75%.

The spread of interest rates on loans to large corporations and SMEs, which has been steadily expanding from 2015 to 2018, has rather narrowed in 2019 and 2020. This is partially explained by the government's steady efforts to create a favourable loan environment for SMEs. In particular, in 2020, the interest rate spread between loans to large enterprises and SMEs fell by about 0.1 percentage points compared to the same period of the previous year, which is considered to be related to the increase in lending to large enterprises in 2020. Large firms, which mainly raise funds from the corporate bond market, increased demand for bank loans in 2020 as the corporate bond market shrinks, putting upward pressure on the interest rates on bank loans to large corporations.

The rejection rate increased significantly from 2015 to 2018. However, in 2019, the rejection rate decreased by about 5.1%p compared to 2018.

Venture investment in 2020 recorded an all-time high of KRW 4.304.5 trillion, breaking the previous record high of KRW 4.27 trillion in 2019. In addition, the number of investment cases (4,231 cases) and the number of investee companies (2,130 companies) in 2020 also surpassed 4,000 and 2,000 for the first time, respectively, recording all-time highs.

According to the data released by the Ministry of SMEs and Startups, in the second quarter of last year, investment decreased significantly (△27.4%) compared to the same quarter of 2019. This trend of investment recovery continued in the fourth quarter, with investment reaching KRW 1.41 trillion in the fourth quarter alone (increasing KRW 253.3 billion, +21.9% compared to the fourth quarter of 2019).

As such, the increase in investment (+KRW 366 billion ) in the second half of 2020 (3rd - 4th quarter) surpassed the decrease (△ KRW 39.2 billion) in the first half (1st and 2nd quarters).

Nevertheless, the growth rate, which has continued at more than 10% annually since 2017, has been greatly reduced in the aftermath of COVID-19, showing only an increase of about 0.63% in venture and growth capital in 2020 compared to 2019. In particular, it was found that investment in the distribution/service and video/performance/record industries, where related industries were generally damaged in the aftermath of COVID-19, decreased compared to 2019.

Payment delays are calculated as an average, dividing the total number of days payments on short-term loans are overdue divided by the number of SMEs that possess overdue accounts. The average days of delay for short-term SME loans decreased from 13.3 days in 2016 to 7.4 days in 2018, the lowest figure over the period. However, it increased again from 2019 and increased to an average of 8.4 days in 2019 and an average of 8.5 days in 2020.

According to the Bank of Korea, the number of bankruptcies increased to 2 735 in 2008, after the global financial crisis. This figure decreased since then, and reached 292 in 2020, a record low. The decline until 2019 can be attributed to the economic recovery and financial support from the government.

However, in the case of 2020, bankruptcies declined significantly despite the damage caused by COVID-19, which is judged to be the result of the government's expansionary and active financial policies. In particular, the policy of extending loan maturity and deferring principal and interest payment seems to play a major role.

To support small business owners from the COVID-19 outbreak, the Korean government quickly provided low-interest loans through guarantees, extended existing loans' maturity, implemented a policy of deferring principal and interest payments and implemented a direct income preservation policy in the form of previous expenditures.

First, financial support program for small businesses was conducted twice in the 1st (March 2020, KRW 16.4 trillion) and 2nd (April 2020, KRW 10 trillion). As a result, as of January 2021, KRW 18.3 trillion of funds was quickly supplied to about 790,000 small businesses. In particular, in January 2021, the system was reorganized, such as lowering the interest rate (up to 2 percentage points cut) and guaranteeing fees for the secondary financial support program for small businesses (from 0.9% to 0.3% for the first year). In addition, a special support program was newly established to allow small business owners to borrow up to KRW 10 million in loans in industries subject to collective restrictions. For example, The Ministry of SMEs and Start-ups implemented emergency loan support for small business owners with difficulties due to the increase in social distancing related to the COVID-19 pandemic. Individuals or entrepreneurs who meet the criteria for a small business such as average annual sales and do not have loan restrictions such as tax arrears or arrears at financial institutions are eligible for support. The maximum loan limit per company is KRW 20 million, and the loan period is five years at a fixed interest rate of 2% per year.

Second, the Korean government has been implementing measures to extend the principal maturity and defer repayment of principal and interest for small businesses and small businesses affected by COVID-19 in all financial sectors since April 2020. This policy has been extended every six months and is still in effect as of October 2021. The policy is evaluated to have bought time for both small and medium-sized businesses and the financial sector to respond to the impact of COVID-19. In particular, according to the analysis of the Bank of Korea, the deferred payment of principal and interest lowered the proportion of liquidity-constraint households by 1.8~1.9 percentage points and lowered the proportion of insolvent households by 0.6 percentage points. However, as the insolvency is accumulating considering the extension of repayment deferral, there is also an opinion that a more active soft landing and countermeasures for vulnerable borrowers are needed.

Due to the extension of the principal maturity and the deferral of principal and interest repayment, the maturity of loans totalling KRW 209.7 trillion (819,000 cases) was extended from April 2020 to July 2021. In addition, a deferral of principal repayment of KRW 12.1 trillion (78 thousand cases) and a deferment of interest repayment of KRW 209.7 billion (15 thousand cases) were implemented. Among the balance of the deferred principal and interest repayment loan, the proportion that received pre-consultation according to the soft-landing plan (effective from April 2021) is reported to be 10.4%. Some banks provide soft landing consulting immediately when applying for a new repayment deferral, so the support performance is increasing.

Third, the Korean government implemented a direct income preservation policy in the form of previous expenditures. For example, the Small Business Hope Recovery Fund policy supports up to KRW 20 million to small businesses that have implemented the ban due to the prohibition of gatherings. In addition, a maximum of KRW 9 million was provided to small businesses (including small business owners) whose sales have decreased due to business restrictions as part of the government quarantine measures. Meanwhile, a maximum of KRW 4 million was provided to small businesses whose industry sales have decreased by more than 10% due to the COVID-19 crisis.


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