After the announcement of the 25% mutual tariff policy by the U.S. government, banks are deeply contemplating the management of small and medium-sized enterprise loans. As the arrears rate for small and medium-sized enterprise loans continues to rise, along with worsening corporate management issues, the emergency light has turned on for managing the soundness of loan assets. While keeping a close watch to prevent a rapid increase in arrears on small and medium-sized enterprise loans, banks plan to embark on a 'two-pronged approach' of market support and soundness management through debt restructuring.
According to the financial sector on the 7th, major banks are seeking ways to manage the soundness of small and medium-sized enterprise loans in the aftermath of the U.S. government's announcement of mutual tariffs. KB Kookmin Bank has categorized the impact of tariff imposition into three risk levels: high, medium, and low, and has begun monitoring the risk levels of individual industries. Additionally, the results of tariff negotiations will be reflected in the regular industry rating evaluations for the first half of this year. Industry ratings refer to the grades assigned by each bank based on the soundness or risk of the industry sectors. Banks utilize these ratings in their credit risk management activities. Shinhan Bank and Woori Bank held an emergency meeting to discuss response measures following the announcement of mutual tariffs. SC First Bank is currently assessing the status of small and medium-sized enterprises that have received loans and plans to review related measures.
The shock from the mutual tariffs from the U.S. could lead to a deterioration in the soundness of banks' small and medium-sized enterprise loans. High tariffs increase the prices of exports to the U.S., diminishing the competitiveness of local goods. As export competitiveness weakens, not only exporting corporations but also small partner companies (vendors) can easily encounter production declines and management challenges. When business management deteriorates, the ability to repay loans immediately decreases. On the other hand, the demand for loans for financial flexibility is likely to increase. It creates an environment where the scales of arrears and insolvency among small and medium-sized enterprise loans are likely to grow.
In addition, the arrears rate for small and medium-sized enterprise loans had been steadily rising even before this mutual tariff announcement. According to the Financial Supervisory Service, as of the end of January, the arrears rate for bank loans to small corporations was recorded at 0.81%. This is the highest level since the Financial Supervisory Service first published the arrears rate statistics for small corporation loans in January 2020. The arrears rate for small corporation loans refers to the percentage of arrears specifically calculated for corporate borrowers among small businesses, excluding individual entrepreneurs. This puts banks in a situation where they urgently need to prepare measures for managing the soundness of small and medium-sized enterprise loans.
Currently, banks are contemplating options such as extending maturity and reducing interest. The banking sector plays a public role in circulating money within the market. Therefore, the more challenging the economy becomes, the louder the calls for financial institutions to provide funding become. Banks cannot simply raise the barriers for lending while ignoring these demands. At this time, if banks implement maturity extensions and interest reductions, they can justify their actions by ensuring they do not cut off the funding for small and medium-sized enterprises. Simultaneously, banks can defer the occurrence of arrears, which allows them to avoid a rise in the arrears rate on their books.
Experts noted that while the impact of the recent mutual tariffs should be closely monitored, it is not expected to significantly threaten the soundness of banks. Lena Kwak, a senior researcher at Bloomberg Intelligence, analyzed that "the mutual tariffs from the U.S. impose a blow to the export-driven Korean economy, increasing the soundness risks for banks." Kwak also projected that "since major banks in Korea have already set aside sufficient loan loss provisions, they will likely be able to offset the soundness deterioration to some extent."
Meanwhile, some in the financial sector argue that simply pouring money into the banks is not a universal solution. They advocate for the idea that limited funds should be allocated to limited corporations through proper filtration in the market. A financial sector official pointed out that "during the COVID-19 pandemic, the government and banks indiscriminately released money, turning marginal corporations into zombie firms," and emphasized that "support should be abundant for capable corporations, but the phenomenon of indiscriminately injecting money into marginal corporations should not be repeated."