Default Rate Rises Among Small Firms

Written by Writer on Wednesday, October 22nd, 2008

Default Rate Rises Among Small Firms

By Yoon Ja-young
Staff Reporter
Korea Times
10-22-2008

Banks are seeing a rising default rate on loans they have given to small businesses.

According to the Financial Supervisory Service (FSS), the default rate of loans made in the Korean currency averaged 0.97 percent as of the end of September, rising 0.08 percentage points from a year ago.

The default rate of banks’ lending to small and medium sized firms, however, was much higher at 1.5 percent, a 0.28 percentage-point rise from a year ago.

A soaring won/dollar rate and global raw material price hikes are making it increasingly difficult for small firms to pay back loans on time.

The rate for corporate lending rose 0.18 percentage points to 1.3 percent. Conglomerates and households, meanwhile, are seeing their default rates fall.

The rate for large businesses fell 0.07 percentage points to 0.31 percent, while that for households was 0.58 percent, down 0.08 percentage points.

The regulator said local banks are generally okay in terms of financial stability when considering that the default rate is low. Banks recorded 6.7 trillion won in net income in the first half of this year, and allowance rate for bad debts hovers above 190 percent.

With economic conditions worsening, however, the regulator said it would strengthen risk monitoring as small businesses could face tougher times.

Banks massively increased lending to small businesses last year as the real estate market cooled down. The lending to small firms grew by 68.2 trillion won, compared with only 12.5 trillion won in 2005.

Banks are now cutting these loans due to the rising default rates, which negatively affects their credit ratings.

Mutual savings banks are also refraining from extending loans to small businesses as they are suffering losses from project financing.

Default rates are expected to continue to rise until the end of the year. The global economy is expected to be in trouble until the next year, and a quick recovery isn’t likely. On top of the pessimistic conditions for exports, small businesses are squeezed by the rising won/dollar rate, which pushes up the prices of raw material imports.

chizpizza@koreatimes.co.kr