[Editorial] SME Delinquency Rate Hits 8.5-Year High, Urgent Need to Restructure Marginal Companies

The growing financial strain on SMEs, often described as the backbone of the economy, is sounding alarm bells for the Korean economy. According to a fact book summarizing the management status of the four major commercial banks, the average delinquency rate for SME loans at KB Kookmin, Shinhan, Hana, and Woori Bank reached 0.53% in the third quarter of this year—the highest level in eight and a half years since the first quarter of 2017 (0.59%). At the Industrial Bank of Korea, which handles the largest volume of SME loans, the delinquency rate has climbed to 1.0%, the highest since the financial crisis.
The rise in SME delinquency rates stems from sluggish domestic demand and the impact of high costs and interest rates, leaving financially weaker companies struggling to repay principal and interest. When delinquencies occur, banks tighten their lending standards, which can further deteriorate companies’ financial conditions. If a credit crunch ensues, it could trigger a vicious cycle of bankruptcies, rising unemployment, regional economic stagnation, and weakened bank soundness.
As business slumps and funding shortages converge, the number of marginal companies unable to pay even interest with their earnings has reached a record high. The proportion of so-called 'zombie companies'—those in this marginal state for more than three years—rose from 14.4% in 2004 to over 17% last year. Labor productivity at these zombie companies is less than half that of healthy firms. As the share of such companies grows, economic efficiency and growth potential inevitably decline. The Korea Chamber of Commerce and Industry has also noted that, as corporate growth stagnates, the number of Korean companies among the world’s top 2,000 has dropped to 62 this year, down by four from a decade ago.
Of course, there are also a considerable number of companies with technological prowess and growth potential that have become delinquent due to temporary liquidity crises. According to the venture industry, the number of startups filing for closure surged from 101 in 2022 to 191 last year. Many of these were venture firms recognized for their technological potential by private investors. Promising tech companies are failing to survive the so-called 'death valley'—the early stage funding gap—and are shutting down one after another. These companies urgently need swift and sufficient capital support.
The government already operates ongoing restructuring programs for zombie companies and supports promising SMEs through initiatives such as the 'hidden champions' program. It is also emphasizing 'productive finance,' which redirects bank capital toward innovative companies and new industries. Nevertheless, the structure in which promising firms struggle to grow while insolvent companies merely survive continues to repeat. This is because banks remain entrenched in collateral-based and past performance-driven lending practices.
The issue of SME loan delinquencies cannot be resolved simply by reducing the amount in arrears. The vicious cycle of insolvent companies surviving on loans must be broken, and the financial system must be reformed so that capital flows swiftly to companies with strong technology and growth prospects. Resources should be reallocated by moving away from collateral-based practices and strengthening assessments of future value and technological capability.
If these urgent reforms are delayed, insolvencies will accumulate and promising companies will disappear before they have a chance to blossom. The warning signs are already evident everywhere.