Interest rate hikes are intended to cool an overheating economy, but they often first impact the most vulnerable sectors. Since the tightening phase began in 2022, an increasing number of companies have struggled to manage interest payments, while self-employed individuals face rising delinquency risks. With the Bank of Korea resuming tightening for the first time in three and a half years, concerns are growing that the scars from the previous tightening cycle may be repeated.
According to the Bank of Korea and other sources, indicators of distress among businesses and self-employed individuals have shown a marked deterioration since the last period of rising interest rates. A notable example is the increase in so-called 'zombie companies.' The Bank of Korea's '2022 Corporate Management Analysis' report indicates that 35% of companies have an interest coverage ratio below 100%, meaning they cannot cover interest expenses with operating profits.
The rise in interest rates has increased financial burdens, compounded by sluggish domestic demand and a slowdown in exports, significantly weakening corporate profitability. Small and medium-sized enterprises (SMEs) are particularly vulnerable, facing greater impacts from interest rate fluctuations compared to larger corporations.
The situation for self-employed individuals is similarly dire. In 2023, the delinquency rate for personal business loans reached 0.66%, the highest since relevant statistics began in 2017. The combination of accumulated debt from the COVID-19 pandemic and high borrowing costs has sharply increased repayment burdens.
Compounding the issue is the fact that the previous tightening cycle's wounds have not yet healed, and interest rates began to rise again in 2026. As economic slowdown and weak domestic demand persist, increased interest burdens could further erode the repayment capacity of vulnerable companies.
As of the end of May this year, the delinquency rate for SME loans at domestic banks was 1.00%, the highest level since May 2015 (1.11%). The delinquency rate for loans to small corporations also reached 1.11%, the highest since May 2017. This indicates that the problems that began during the last tightening cycle are not being resolved but are instead accumulating.
There are growing concerns that rising delinquency rates could lead to a vicious cycle, raising the barriers for bank loans. According to the Bank of Korea's 'Financial Institution Lending Behavior Survey,' banks expect credit risks for SMEs to increase. As credit risks rise, banks tend to tighten loan assessments and adopt a more conservative approach to lending.
There is also a trend of bank funding flowing more toward large corporations than SMEs. As of the end of last month, the outstanding balance of SME loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was 682.72 trillion won, a decrease of 1.7368 trillion won (0.3%) from the previous month. In contrast, loans to large corporations increased by 4.9285 trillion won (2.7%) to 190.36 trillion won during the same period.
As cash flow worsens for SMEs due to declining sales and increased interest burdens, higher loan thresholds could lead to a greater risk of delinquency turning into insolvency. Companies with weaker financial capabilities are the first to feel the impact of rising interest rates and reduced lending.
A financial industry official stated, “What is more concerning than the interest rate hike itself is that the distress has already accumulated. If additional tightening continues without fully addressing the aftereffects of the previous cycle, the credit risks for SMEs and self-employed individuals could rise more rapidly than expected.”
* This article has been translated by AI.
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