SME loan delinquencies reach 15-year record amid slump

The delinquency rate on corporate loans at the state-run Industrial Bank of Korea (IBK), which specializes in lending to small and medium-sized enterprises, rose to 1.03 percent in the third quarter. It was the highest level in 15 years, since the third quarter of 2010, when the rate reached 1.08 percent in the wake of the global financial crisis. The sharp increase reflects a surge in small and medium-sized firms struggling to repay loans on time amid a prolonged economic downturn.

The average delinquency rate for SME loans at the five major regional banks also rose to 1.10 percent in the third quarter, up 0.53 percentage points from a year earlier. With both state-run and regional banks surpassing the 1 percent risk threshold, concerns are mounting that SME loan quality is deteriorating rapidly.

The figures underscore the dire situation facing small and medium-sized enterprises hit by sluggish domestic demand and U.S.-led tariff shocks. Already struggling with surging labor and raw material costs and an influx of cheap Chinese imports, many firms are now under additional pressure from high tariffs. In August alone, when the U.S. extended its 50 percent tariffs on steel and aluminum to more than 400 derivative products, 133 small exporters in related industries shut down.

At a steel distribution complex in Siheung, Gyeonggi Province, a Dong-A Ilbo reporting team found rows of shuttered factories with “For Lease” signs hanging out front. Local suppliers lamented, “It’s tougher than during the financial crisis,” and, “Even though we work only three or four days a week, there’s so little business that we go home before lunch.”

Many SMEs that had stayed afloat through borrowing are now collapsing under the combined weight of stagnation and high interest rates. Between January and September, 1,666 companies filed for bankruptcy, more than 200 higher than in the same period last year. As of last year, 18 percent of SMEs were classified as “zombie firms,” unable to pay even the interest on their loans for three consecutive years.

What is more concerning is that business conditions show no signs of improvement. According to the Korea Federation of SMEs, the business outlook index for November stood at 77.5, well below the neutral level of 100. This indicates that more companies expect both exports and domestic demand to worsen. SMEs with limited capacity to hedge against currency volatility remain exposed as the Korean won edges toward 1,450 per U.S. dollar. Meanwhile, the warmth of the semiconductor supercycle has yet to reach smaller manufacturers in the supply chain.

As protectionism intensifies, rescuing SMEs, the backbone of South Korea’s exports and employment, is vital to the nation’s economic survival. The government must prevent competitive firms from collapsing under temporary shocks through expanded trade, tax, and financial support, as well as efforts to secure new markets. Structural reforms are also needed to ensure a soft landing before a wave of zombie-firm defaults triggers a bad-debt crisis. The desperate pleas of SMEs standing on the brink of collapse must not be ignored.