Half of SMEs cannot pay back loan interest

Around half of the local small-and medium-sized enterprises (SMEs) have been categorized as “vulnerable entities” having trouble paying back their loan interests on time owing to the deteriorating operating profits from last year. While the South Korean government introduced a scheme to postpone the maturity date of loan and interest payments, the financial woes of SMEs remain unabated. The flurry of companies already at the end of the year owing to the expansion of the 52-hour week rule and the soaring prices of raw materials will be eventually prized out of the market if the current shockwave is further fueled by an increase in interest rates and minimum wage.

According to the Bank of Korea, among 1,244 SMEs in South Korea, 50.9% could not afford to pay interest owing to their plummeting operating profits. Faced with a fall in sales and profits by the COVID-19 pandemic, companies have no choice but to borrow more money to keep afloat and pay their workers. From April last year to late September this year, the South Korean government has postponed the repayment of the principal and interest of loans for SMEs over three times, and the total amount of SME loans from the five major commercial banks in the country swelled to 541.2 trillion won.

Following the fourth wave of the coronavirus, the ruling party of South Korea argues that the repayment should be postponed yet again after September. With the pandemic showing no sign of ending, however, repeated extensions of loan payments are little less than sitting on a time bomb. Even if another extension should be granted, it must be preceded by a process to monitor suitable candidates first based on their competence and solvency to preempt the aftermath and boost the efficiency of resources.

The problem is not confined to financial; the labor policy pressed on by the government is adding burden to the SMEs. In fact, the smaller-sized companies are complaining an extreme shortage of manpower since the 52-hour week rule was implemented on companies that hire five to 49 employees. Skilled workers who had depended on the overtime payments are quitting one after another, seeking alternative job opportunities in better paying positions such as deliverymen. The misery is the result of the government turning a blind eye to the companies imploring to postpone the introduction of the workhour regulation until after the coronavirus is over. Many business owners are considering shutting down as the minimum wage is to rise by another 5.1 percent next year.

Even so, the restructuring of marginal enterprises cannot be postponed forever as it poses a grave threat to jeopardize the entire economic and financial system. The government must come up with a plan to winnow out competent SMEs and support the owners and workers of a company that will inevitably face a shutdown. The financial sector, which is enjoying an unprecedented bonanza, must step up to share the onus. A swift measure must be taken to minimize the shock once the extension is over such as by separating the maturity dates for principal and interest payments.