copy the linklink copied!26. Korea
copy the linklink copied!Key facts on SME financing
The share of outstanding SME loans has increased continuously from 2014, with a KRW 41 trillion increase in 2018. Meanwhile, the stock of outstanding loans for large firms decreased during the same period, by approximately KRW 0.5 trillion, resulting in an increase in the share of outstanding SME loans.
Outstanding short-term loans as a share of total loans have declined continuously between 2007 (75%) and 2018 (50%). Both the level of outstanding short-term loans and the level of outstanding long-term loans have increased continuously from 2007. However, the growth rate of outstanding short-term loans has been higher than that of outstanding long-term loans.
While the level of government guaranteed loans has been on the rise since 2011, government guaranteed loans to SMEs as a share outstanding business loans to these firms has decreased continuously from 2012. Between 2017 and 2018, the volume of government-guaranteed loans rose by 2.8%. The amount of direct lending to SMEs in 2018 was KRW 4.4 trillion, which is about 0.6% of all outstanding business loans to SMEs.
Since 2013, the rate of non-performing loans has decreased continuously. 1.1% of all SME loans were non-performing in 2018, below the 2017 figure (1.17%). On the other hand, 1.88% of all business loans were non-performing in 2018, indicating that large business loans are more liable to be non-performing than SME loans.
Interest rates for SMEs increased by about 0.2 percentage points from 3.62% to 3.82% in 2018. On the other hand, interest rates for large firms increased by about 0.14 percentage point from 3.31% to 3.45% in 2018, resulting in higher interest rate spread between loans to SMEs and to large firms. However, SME interest rates are still quite low on average.
Venture and growth capital investments increased rapidly in 2018. The growth rate of venture and growth capital was 43.89%, with investments going from KRW 2.38 trillion to KRW 3.42 trillion.
Leasing and hire purchases volumes rose by 0.05% in 2018, which implies that these instruments were stable in 2018.
Since the global financial crisis, the number of bankruptcies has steadily decreased. Payment delays decreased by 1.5 days, on average, in 2018.
copy the linklink copied!SMEs in the national economy
In total, the number of firms and employment increased during 2016-2017. The number of establishments in 2016 was 3 676 499, while it stood at 4 019 872 in 2017. Meanwhile, the number of employees in 2016 was 17 051 453, while it stood at 21 626 904 in 2017. The growth rate of the number of establishments in SMEs during 2016-2017 is about 9.4%, while that in large firms is about -2.5%. This means that the rising number of firms is driven by the increase in the number of SMEs.
SMEs constituted 99.9% of Korean enterprises in 2017. Compared to previous year, the share of micro-enterprises increased from 85.3% to 91.9%, while the shares of small and medium-sized enterprises decreased from 11.7% to 6.9% and from 2.8% to 1.1% respectively.
SMEs’ share of employment decreased from 90.3% to 85.4% in 2017. Even though large enterprises constitute only 0.1% of all businesses, they account for 14.6% of corporate employment, a share which increased compared to 2016 (9.7%).
copy the linklink copied!Total SME lending
Total outstanding business loans more than doubled between 2007 and 2018. The indicator stood at KRW 424.8 trillion in 2007, while it reached KRW 857.39 trillion in 2018. The increase (KRW 432.59 trillion) in total outstanding business loans is largely driven by the increase in SME loans, representing KRW 327.39 trillion (about 75.7%).
As shown in Figure 26.1, the stock of outstanding loans for large enterprises has decreased since 2015, while the same indicator for SMEs has increased steadily. As a result, the share of outstanding SME loans increased.
There are several economic factors behind these facts. From 2020, the Korean government will implement a new regulation on banks to maintain their ratio of loans to savings under 1 with different weights on household loans and business loans. Under the previous regulation, every financial institution was required maintain their ratio of loans to savings under 1 without giving different weight on household or business loans. Under the new regulation, however, household loans are weighted by 15 percentage points more, while SME loans are weighted by 15 percentage points less when the ratio is calculated. And banks are still required to maintain the ratio under 1. In essence, the new rule encourages each banks to increase SME loans and decrease household loans in their loan portfolios.
On the other hand, outstanding loans to large enterprises have decreased, given that these enterprises tend to borrow money through corporate bonds instead of bank loans. This is due to the fact that the interest rates of corporate bonds are lower, on average, than interest rates for bank loans to these firms (2.18%, as opposed to 3%). Under these circumstances, outstanding loans to SMEs have increased while those to large enterprises have decreased.
Outstanding short-term loans to SMEs increased by about KRW 10.5 trillion, while outstanding long-term loans to SMEs increased by about KRW 30 trillion in 2018. As a result, the share of short-term lending decreased about 1.2 percentage points, from 51.26% to 50.08%. Several reasons explain the decrease in the share of short-term lending. Firstly, these days when large firms make payments to subcontracting firms (which are usually SMEs) they tend to pay by cash instead of issuing bills. So subcontracting firms do not need to borrow working capital from banks anymore, reducing short-term loans. Secondly, firms require more investments in equipment and real estate, which leads them to borrow money with longer maturities.
copy the linklink copied!Credit conditions
Interest rates for both SMEs and large firms decreased between 2010 and 2017. However, in 2018, interest rates for both categories increased by about 0.2 percentage points and 0.14 percentage points respectively.
Fluctuation of loans interest rates depends on changes in base rate, tax, or value of collaterals etc. Figure 26.2 shows that fluctuations in Bank of Korea’s base rate strongly influence interest rate fluctuations for both SMEs and large firms. The base rate in Korea increased between 2016 and 2018. On the first year of base rate’s increase, the downward trend of loan interest rates slowed down: in 2016, interest rates decreased about 0.3-0.4 percentage points, while in 2017 the interest rates decreased only about 0.01-0.09 percentage points. In the second year of base rate’s increase, interest rates eventually increased: interest rates increased about 0.14-0.2 percentage points in 2018.
The interest rate spread between SME loans and large enterprise loans has increased steadily since 2015. In 2015, the spread was 0.16 percentage points, while in 2018 the spread stood at 0.37 percentage points. Large firms may issue corporate bonds to raise funds, while SMEs in Korea are not able to raise funds by issuing corporate bonds. This means that when banks’ lending policy becomes more conservative, interest rates on SME loans tend to increase faster than those for large firms.
A survey from the Industrial Bank of Korea (IBK) points that the rejection rate on SME loans applications stood at 15.5% in 2018 which has been increasing from 2015. SMEs are defined by the IBK as firms with 5-299 employees, so essentially does not take into account micro firms with less than 5 employees. Historically, this survey points that rejection rates were respectively 6.9% and 3.7% in 2014 and 2015, but have since then increased, to 12.2% and 12.9% in 2016 and 2017.
copy the linklink copied!Venture and growth capital investment
Venture and growth capital investments increased notably in 2018. The growth rate of venture and growth capital in 2018 is about 43.9%, which is very large compared to previous years.
Several government initiatives fostered an increase in venture and growth capital investments in 2018. Firstly, through fiscal policy the Korean government increased the total funding for the Korean fund of funds, which is operated by Korea Venture Investment Corporation, to KRW 800 billion. Second, the minimum capital requirement for the establishment of a start-up investment company was reduced from KRW 5 billion to KRW 2 billion. Furthermore, since 2017, Korean government have introduced large tax incentives, especially to private investors when they invest their money in small and innovative companies. Tax incentives are usually implemented through an increase in the tax refund rate for investments in small and innovative companies. In addition, the range of companies which are regarded as small and innovative companies increased. These policies are one of the main reasons that led to the strong growth experienced by venture and growth capital in 2018.
However, one should be careful when interpreting the 2018 increase, since other characteristics of the economic environment may also induce rapid expansions in the venture and growth capital market. First, the Korean stock market contracted by about 16% during 2018. Second, during the same period, the Korean government tried to stabilise the real estate market price and introduced strong regulations in the sector. Such regulations restrict options for investors and push them to invest in small and innovative companies.
copy the linklink copied!Other indicators
Payment delays are calculated as an average, dividing the total number of days payments on short-term loans are overdue divided by the number of SMEs that possess overdue accounts. The average days of delay for short-term SME loans decreased from 13.3 days in 2016 to 7.4 days in 2018, the lowest figure over the period.
According to the Bank of Korea, the number of bankruptcies increased to 2 735 in 2008, after the global financial crisis. This figure decreased since then, and reached 469 in 2018, a record low. Economic recovery and financial support from the government have helped reduce the prevalence of bankruptcies in Korea.
The share of non-performing loans for SMEs decreased to 1.10% in 2018, the lowest figure in the past 10 years. As in previous years, low interest rates and financial support from the government may have contributed to this trend. Additionally, Korean banks are still very selective in their lending standards towards SMEs.
copy the linklink copied!Government policy response
In 2018, the level of outstanding government guaranteed loans to SMEs increased by about KRW 1.8 trillion, while the ratio of outstanding government guaranteed loans to SMEs and direct government loan to SMEs decreased during the same period. Government-guaranteed loans reached KRW 67.58 trillion in 2018. About 9.71% of SME loans were guaranteed by the Government in 2018. The amount of direct lending to SMEs was KRW 4.42 trillion in 2018, which represents about 0.6% of all outstanding business loans to SMEs.
The Korean government increased the total value of the Korean fund of funds to provide government financial support to start-ups, ventures, and SMEs. The “Innovation Venture Capital Fund” plans to raise KRW 10 trillion over the next 3 years, beginning in 2018. The government will invest KRW 3.7 trillion in the fund, while the remaining KRW 6.3 trillion will be provided by private funds.
The Financial policy roadmap for 2019, prepared by the Korean Financial Services Commission, reveals plans for SMEs in 2019. First, “the government will provide a total of KRW 4.6 trillion in government-backed loans and loan guarantees for small and medium-sized shipbuilders, equipment and auto parts manufacturers”. Second, “the Korean government launched in January a financial support program of KRW 15 trillion over the next three years to support SME’s investment in equipment, environmental safety facilities and business reshuffling”. Third, “the Korean Financial Services Commission will overhaul financing mechanisms to enable start-ups and SMEs to borrow or raise funds based on their growth potential”.
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 whose average sales or annual sales meet the standards in Table 26.5 and total assets are less than KRW 500 billion. 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
References
Bank of Korea, “Economic Statistics System”, available at: http://ecos.bok.or.kr/flex/EasySearch_e.jsp
Financial Services Commission, “Financial Policy Roadmap for 2019”, available at:
http://www.fsc.go.kr/eng/new_press/releases.jsp?menu=01&bbsid=BBS0048
Financial Supervisory Service, “Monthly Financial Statistics Bulletin”, available at: http://efisis.fss.or.kr/fss/fsiview/indexw.html
Korea Credit Guarantee Fund, “Annual Report 2017”, available at:
https://www.kodit.co.kr/index.jsp
Korea Venture Captial Association, “Venture Capital Market Brief” available at: http://www.kvca.or.kr/Program/board/list.html?a_gb=board&a_cd=15&a_item=0&sm=4_1
Korea Venture Investment Corp, available at:
Ministry of SMEs and Startups (MSS), “Statistics DB Search”, available at: http://www.mss.go.kr/site/smba/06/10602010000002016102405.jsp
Ministry of Strategy and Finance, available at:
http://english.mosf.go.kr/main.do
Small Business Corporation (SBC), available at: http://home.sbc.or.kr/sbc/index.jsp
Statistics Korea, Census on Establishments, available at: http://kostat.go.kr/portal/eng/index.action
The Credit Finance Association of Korea, “Industry Information”, available at:
https://www.crefia.or.kr/english/statistics/creditcardResultUpdateView.xx
The Industrial Bank of Korea, “SME Financing survey”, available at:
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