One in five small and midsize corporations and self-employed businesses faced a risk of arrears over the past year while repaying principal and interest. As financial burdens grow due to falling sales and a high lending rate, more corporations are moving to cut expense.
The Korea Federation of Small and Medium Enterprises announced on the 27th the results of a "survey on the financial expense burden of small and midsize corporations and the self-employed," conducted on 500 small and midsize corporations. The survey was carried out before the decision by the the Bank of Korea's monetary policy committee on the 16th to raise the base rate.
In the survey, 26.4% of corporations said their current level of debt is burdensome, 6.0 percentage points higher than the 20.4% who said it is not. By size, 28.1% of small corporations and self-employed businesses felt a debt burden. That is 7.0 percentage points higher than the proportion of respondents among midsize corporations, at 21.1%. The smaller the corporation, the more vulnerable it was found to be to increases in financial expense.
Those who said they had fallen into arrears on principal and interest within the past year came to 1.8%. Although it did not lead to actual arrears, corporations that experienced the risk of arrears was found at 20.0%.
All corporations with experience of arrears were small corporations or self-employed businesses. The share of small corporations and self-employed businesses that fell into arrears or faced the risk of arrears was 24.2%, 9.6 percentage points higher than midsize corporations at 14.6%.
Among corporations that feel a debt burden, when asked how long they could keep operating if the current situation continues, "two years or longer" was the most common answer at 54.5%.
However, the proportion of small corporations and self-employed businesses that said it would be hard to hold out for one year reached 27.4%. That is three times higher than the same proportion of respondents among midsize corporations at 7.7%. This suggests that if rates and economic conditions worsen further, micro corporations' ability to continue operating could decline.
The main reasons cited for the debt burden were falling sales and deteriorating operating profit (67.4%). A high lending rate followed at 37.9%, and higher raw and subsidiary material prices were at 34.8%.
Corporations said they are responding to reduce financial burdens by cutting investment and labor costs. The highest share, at 58.3%, said they are reducing their own expense, while 22.0% said they have no particular response measures. Corporations using policy finance totaled 20.5%.
As necessary support measures, expansion of policy finance (58.8%) was suggested. Maturity extensions and repayment deferrals (52.2%) and the reintroduction of programs to support high interest (43.2%) followed.
Lee Min-kyung, head of policy at KBIZ, said, "Since falling sales and deteriorating operating profit were found to be the biggest causes of the debt burden, we need to boost the repayment capacity of small and midsize corporations and the self-employed through a recovery in domestic demand and economic stimulus in the second half."