Korea

SMEs in the national economy

SMEs constituted 99.9% of Korean enterprises in 2013, with the vast majority being micro enterprises employing up to 9 employees (93.2% of employer enterprises). Small and medium enterprises accounted for another 6.7% of all employer enterprises. Large enterprises with more than 250 employees constitute only 0.1% of all employer enterprises.

Table 22.1. Distribution of firms in Korea, 2013

Firm size (employees)

Number

%

All firms

2 798 139

100

SMEs (1-249)

2 795 865

99.9

Micro (1-9)

2 608 672

93.2

Small (10-49)

162 170

5.8

Medium (50-249)

25 023

0.9

Large (250+)

2 274

0.1

Note: Data includes financial enterprises with the exception of holding companies (ISIC Rev.4 sector 642).

Source: OECD, Entrepreneurship at a Glance, 2015.

 http://dx.doi.org/10.1787/888933333091

With the services industry in Korea growing at a high pace, and with the government focusing its efforts on nurturing and supporting SMEs, the status of SMEs is becoming increasingly more important for the country. In 2011, SMEs employed for the first time more than 50% of the country’s economically active population, with the number of SME employees standing at 1.3 million, according to Statistics Korea. SME employees stood at 39.2% of the total workforce in 2000 and grew to 50.3% in 2011, following a consistent pattern of growth throughout this period.

SME lending

Korea’s definition of an SME varies by sector (see Box 22.1). SME and total business loans increased over the period 2007-14 by 41.2% and 66.2%, respectively. SME loan shares were calculated on the basis of total outstanding business loans (i.e. stocks). As loan growth for all business loans outpaced SME loan growth, the SME share of business loans declined from 86.8% in 2007 to 74% in 2014, which is still a high percentage by international standards. The proportion of short term lending to total business lending continuously declined from 2007 (75%) to 61.9% in 2013, and further to 59.4% in 2014.

The above figures were probably due to the more conservative attitude of the banks at the end of the review period. At the beginning of the crisis, SMEs had access to credit despite the somewhat alarming rates of increase in non-performing SME loans (NPLs), which roughly doubled from 0.9% of all SME loans to 1.8% in 2008, and even further to 2.3% in 2010 (but still well below the levels observed in many other OECD countries). The proportion of NPLs decreased sharply in 2011, decreased modestly in 2012 and 2013, and slightly decreased to 1.5% in 2014. Data for non-performing loans include domestic and foreign currency loans.

Credit conditions

The average interest rate charged on outstanding SME loans peaked in 2008 at 7.5%, but then declined steadily to 5.1% in 2013 and to 4.7% in 2014, which is still a relatively high interest rate compared with Western economies, which had taken loose monetary stances, in contrast to Korea. The higher rates probably reflected the greater risks faced by Korean banks and inflation trends. The interest rate spread between SMEs and large firms also reached a maximum in 2008 at 79 basis points, and dropped substantially in the following years to a low of 18 basis points in 2014 (compared with 24 basis points in 2013), which is low by international comparison. Banks eased lending conditions for SMEs not because of their willingness to absorb SMEs’ credit risks, which were high, but because of the government’s advice to banks to automatically roll over loans to SMEs. Roll-over rates consequently reached 90%. The government justified this approach on the grounds that banks were not capable of making an accurate assessment of the viability of borrowers during the crisis. Additionally, government guarantee programmes, further discussed below, contributed to the banks’ lending behaviour to SMEs despite their own liquidity shortages and difficulty in meeting regulatory standards.

The ratio between loans requested and loans authorised declined sharply between 2007 and 2008, when almost half of all loans applications (47.2%) were rejected. The relative number of rejections improved in 2009, before reaching a low of 48.7% in 2010. Rejection rates have increased to 46.7% in 2014 from 39.8% in 2013.

After the Korean currency crisis in 1997, the large corporations (conglomerates) accessed financing through direct financing rather than bank loans. Meanwhile, the banking sector focused on household loans as well as on SME loans covered by government guarantees. Thus, SME loans increased dramatically over the following 15 years. However, lending to large enterprises has recently increased due to the increasing concerns about SMEs’ credit risk and household debt problems.

Figure 22.1. Large enterprise and SME loans in Korea, 2001-14
In KRW trillion
picture

Source: Financial Supervisory Service (FSS), Small and Medium Business Administration (SMBA).

 http://dx.doi.org/10.1787/888933331390

Equity financing

Venture and growth capital declined between 2007 and 2008, as in other countries, but rebounded in 2009, 2010 and in 2011, exceeding its 2007 level. In 2014, venture capital investment increased by 18.4% year-on-year because another new fund of funds for “Creative Economy” (which is the current administration’s main focus) was launched and started to invest in innovative SMEs in 2014.

Table 22.2. Venture and growth capital in Korea, 2007-14
In KRW billion

Stage

2007

2008

2009

2010

2011

2012

2013

2014

Early

365.0

290.8

247.6

319.2

372.2

369.6

369.9

504.5

Expansion

377.4

255.3

260.1

290.4

329.6

313.7

325.9

406.9

Later

249.3

178.6

359.4

481.4

559.0

550.0

688.7

727.9

Total

991.7

724.7

867.1

1 091.0

1 260.8

1 233.3

1 384.5

1 639.3

Source: Small and Medium Business Administration (SMBA).

 http://dx.doi.org/10.1787/888933333108

Venture capital was concentrated in the early and expansion stages in 2007. By 2014, venture capital investment was concentrated in the later-stage firms (44.4%), whereas the early and expansion stages were 30.7% and 24.8% respectively.

Other indicators

Data on payment delays were for loans overdue rather than for the average payment delays of customers, suppliers or government. Overdue loans declined in 2009 but rose again in 2011, only to drop to a low in 2012 (22.2% decrease compared to 2011). In 2014, payment delays again rose somewhat to 10 days, still well below the 12.1 days-level observed in 2008 and 2010. Although many SMEs in Korea were financially pinched after the outbreak of the global financial crisis, they avoided bankruptcy, thanks to financial support from the government. In 2014, bankruptcies decreased to 841 from 1 001 in 2013, by 16% year-on-year. It should be noted that while SMEs avoided bankruptcy because of the policies of the central and regional governments, they were still financially stressed due to low economic growth.

Government policy response

There was a 42% increase in the amount of government guaranteed loans during the crisis (2007-09). Moreover, the guarantee coverage ratio was raised temporarily from 85% to 95%, and even to 100% in the case of export credit guarantees. While the Small Business Corporation (SBC) increased its direct lending by only 6.2% between 2007 and 2008; there was a dramatic jump in 2009 (83%). During the recovery, direct loans declined, indicating this type of government assistance was easing off. But at the same time, the SBC loan authorisation rate remained well above 50%. The SBC decreased its direct loans of 2014 by 12% year-on-year.

In 2014, the outstanding government guaranteed loans were at KRW 60.1 trillion which included loans that were backed by two nationwide funds. Policy direct loans provided by the SBC totalled KRW 3.8 trillion in 2014. These loans try to remedy market failures and enhance the competitiveness of SMEs. The Korean Government is now actively looking for other cost effective ways to support SME lending. In addition, the Korean Government is planning on improving the policy-based financial system in order to intensively support innovative small and medium enterprises via high-quality policy rather than through quantitative expansion.

Box 22.1. Definition of SMEs used in Korea’s SME and entrepreneurship finance scoreboard

The BOK (Bank of Korea) and the FSS (Financial Supervisory Service) have the same definition of small and medium-sized enterprises (SMEs).

An SME denotes an establishment that has less than 300 regular employees or paid-in-capital less than or equal to KRW 8 billion (about USD 8 million). This definition of SMEs is based on the Article 2 of the Framework Act on Small and Medium Enterprises and Article 3 of its enforcement decree. SMEs can also be defined as follows:

Table 22.3. Definition of SMEs used by BOK and FSS in Korea

Sector1

SMEs

SmallBusiness

Micro-enterprises

No of Workers

Capital & Sales

No. of Workers

Manufacturing

Less than 300

Capital worth USD 8m or less

Less than 50

Less than 10

Mining, construction and transportation

Less than 300

Capital worth USD 3m or less

Less than 50

Less than 10

Large general retail stores, hotel, recreational condominium operation, communications, information processing and other computer-related industries, engineering service, hospital and broadcasting

Less than 300

Sales worth USD 30m or less

Less than 10

Less than 5

Seed and seedling production, fishing, electrical, gas and waterworks, medical and orthopaedic products, wholesales, fuel and related products wholesales, mail order sale, door-to-door sale, tour agency, warehouses and transportation-related service, professional, science and technology service, business support service, movie, amusement and theme park operation

Less than 200

Sales worth USD 20m or less

Less than 10

Less than 5

Wholesale and product intermediation, machinery equipment rent for industrial use, R&D for natural science, public performance, news provision, botanical garden, zoo and natural parks, waste water treatment, waste disposal and cleaning related service

Less than 100

Sales worth USD 10m or less

Less than 10

Less than 5

Other sectors

Less than 50

Sales worth USD 5m or less

Less than 10

Less than 5

Notes:

1. General Criteria (Article 2 of Framework Act on SMEs and Article 3 of Enforcement Decree of the Act). For micro-enterprises, Article 2 of the Act of Special Measures on Assisting Small Business and Micro-enterprises shall apply.

 http://dx.doi.org/10.1787/888933333114

Table 22.4. Scoreboard for Korea, 2007-14

Indicators

Units

2007

2008

2009

2010

2011

2012

2013

2014

Debt

Business loans, SMEs

KRW trillion

368.87

422.44

443.74

441.02

454.9

461.56

488.98

522.43

Business loans, total (KRW millions)

KRW trillion

424.80

511.20

531.07

541.07

585.70

618.12

654.37

705.96

Business loans, SMEs

% of total business loans

0.87

0.83

0.84

0.82

0.78

0.75

0.75

0.74

Short-term loans, total (KRW trillions); loans for operation

KRW trillion

319

375

373

372

388

395

405

419

Long-term loans, total (KRW trillions); loans for equipment

KRW trillion

106

136

158

169

197

223

249

287

Total short and long-term loans, total (KRW trillions)

KRW trillion

425

511

531

541

586

618

654

706

Short-term loans; loans for operation

% of total business loans

86.38

88.85

84.16

84.31

85.38

85.58

82.83

59.35

Government loan guarantees, SMEs (KRW millions)

KRW trillion

39.73

42.96

56.38

56.2

55.46

56.94

59.52

60.34

Government guaranteed loans, SMEs

% of SME business loans

0.11

0.1

0.13

0.13

0.12

0.12

0.12

0.12

Direct government loans, SMEs (KRW millions)

KRW trillion

2.48

2.63

4.81

3.1

2.96

3.15

3.72

3.27

Loans authorised, SMEs (KRW millions)

KRW trillion

2.72

3.2

5.82

3.42

3.35

3.34

4.18

3.58

Loans requested, SMEs (KRW millions)

KRW trillion

4.65

6.06

9.82

6.66

5.93

5.74

6.94

6.72

Ratio of loans authorised to requested, SMEs

58.5

52.8

59.3

51.3

56.6

58.3

60.2

53.3

Non-performing loans, SMEs (KRW millions)

KRW trillion

3.45

7.71

6.85

10

7.9

7.55

8.01

7.78

Non-performing loans, SMEs

% of SME business loans

0.01

0.02

0.02

0.02

0.02

0.02

0.02

1.49

Average interest rate

%

0.07

0.07

0.06

0.06

0.06

0.06

0.05

4.65

Interest rate spread (between average rate for SMEs and large firms)

%

0.8

0.8

0.6

0.5

0.6

0.4

0.2

0.18

Equity

Venture capital, total amount invested (KRW millions)

KRW million

991 692

724 690

867 096

1 090 987

1 260 836

1 233 300

1 384 500

1 639 300

Venture capital (% rate of change)

Year-on-year growth rate, %

-26.9

19.7

25.8

15.6

-2.2

12.3

18.4

Other

Payment delays, SMEs

Number of days past due date

11

12

10

12

12

9

10

10

Bankruptcies, total (number)

Number

2 294

2 735

1 998

1 570

1 359

1 228

1 001

841

Bankruptcies (% rate of change)

Year-on-year growth rate, %

19.2

-26.9

-21.4

-13.4

-9.6

-18.5

-16.0

Source: See Table 22.5.

 http://dx.doi.org/10.1787/888933333120

Figure 22.2. Trends in SME and entrepreneurship finance in Korea
picture

Sources: Chart A: Financial Supervisory Service (FSS). Chart B: Financial Supervisory Service (FSS) & Small and Medium Business Administration (SMBA). Chart C: Bank of Korea (BOK). Chart D: Small and Medium Business Administration (SMBA). Chart E: Small Business Corporation (SBC). Chart F: Small Business Corporation (SBC).

 http://dx.doi.org/10.1787/888933331400

Table 22.5. Definitions and sources of indicators for Korea’s scoreboard

Indicators

Definition

Source

Debt

Business loans, SMEs

Bank (Commercial Bank + Specialised bank) loans to non-financial SMEs, amount outstanding, stocks

Financial Supervisory Service (FSS)

Business loans, total

Business bank (Commercial Bank + Specialised bank) loans to all non-financial enterprises, amount outstanding, stocks

Financial Supervisory Service (FSS)

Short-term business loans, total

Outstanding amounts, total business loans of less than one year

Financial Supervisory Service (FSS)

Long-term business loans, total

Outstanding amounts, total business loans of greater than one year

Financial Supervisory Service (FSS)

Government guaranteed loans, SMEs

Value of loans guaranteed by KODIT, KIBO; stocks

Financial Supervisory Service (FSS) and Small and Medium Business Administration (SMBA)

Direct government loans, SMEs

Direct government loans supplied and executed by the SBC only

Small Business Corporation (SBC)

Loans authorised, SMEs

Direct government loans from the SBC data base (not from commercial banks). Includes executed and non-executed loans which have been authorised.

Small Business Corporation (SBC)

Loans requested, SMEs

Direct government loans from the SBC database (not from commercial banks)

Small Business Corporation (SBC)

Non-performing loans, SMEs

Domestic Banks’ SME non-performing loans out of total credit including Won-denominated loans, foreign currency-denominated loans, credit card receivables and others (outstanding amount)

Financial Supervisory Service (FSS)

Average interest rate, all loans

Average interest rates charged on new loans during the period, all loans

Bank of Korea (BOK)

Average interest rate, SMEs

Average interest rates charged on new SME loans during the period

Interest rate spread (between average rate for SMEs and large firms)

SME loan rate - Large corporation loan rate

Bank of Korea (BOK)

Equity

Venture and growth capital

Annual amounts invested including early, expansion and later stages

Small and Medium Business Administration (SMBA)

Other

Payment delays, SMEs

Average days of delay past loan contract date

Small and Medium Business Administration (SMBA)

Bankruptcies, total

Bankrupt firms in Small Business Corporation’s portfolio

Small Business Corporation (SBC)

References

Bank of Korea, “Economic Statistics System”, http://ecos.bok.or.kr/flex/EasySearch_e.jsp.

Financial Supervisory Service, “Monthly Financial Statistics Bulletin”, http://efisis.fss.or.kr/fss/fsi/id/fssview04_en.jsp.

Korea Venture Captial Association, “VC firm Summary”, http://ediva.kvca.or.kr/main/index.jsp.

OECD (2015), Entrepreneurship at a Glance 2015, OECD Publishing, Paris,: http://dx.doi.org/10.1787/entrepreneur_aag-2015-en.

Small and Medium Business Administration (SMBA), “Statistics DB Search”, http://stat2.smba.go.kr/index.jsp.

Small Business Corporation (SBC), http://home.sbc.or.kr/sbc/index.jsp.