Financing SMEs and Entrepreneurs 2020

26. Korea

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.

Table 26.1. Scoreboard for Korea

Indicators	Units	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	KRW trillion	369	422	443	441	455	462	489	522	561	610	655	696
Outstanding business loans, total	KRW trillion	425	511	531	541	586	618	654	706	756	776	817	857
Share of SME outstanding loans	% of total business loans	86.8	82.6	83.5	81.5	77.7	74.7	74.7	74.0	74.2	78.6	80.2	81.2
Outstanding Short-term loans, total; loans for operation	KRW trillion	319	375	373	372	388	395	405	419	426	414	419	429
Outstanding Long-term loans, total; loans for equipment	KRW trillion	106	136	158	169	197	223	249	287	330	362	398	428
Share of short-term loans; loans for operation	KRW trillion	75.0	73.4	70.3	68.7	66.3	63.9	61.9	59.3	56.3	53.4	51.3	50.1
Government loan guarantees, SMEs	KRW trillion	40	43	56	56	55	57	60	60	61	63	66	68
Government guaranteed loans, SMEs	% of SME business loans	10.8	10.0	12.7	12.7	12.2	12.3	12.2	11.5	10.9	10.3	10.0	9.7
Direct government loans, SMEs	KRW billion	2 480	2 635	4 812	3 098	2 957	3 149	3 715	3 270	3 902	4 551	4 666	4 415
Non-performing loans, total	% of all business loans	0.81	1.41	1.6	2.6	1.73	1.66	2.39	2.09	2.56	2.06	1.76	1.88
Non-performing loans, SMEs	% of all SME loans	0.99	1.93	1.8	3.11	2.17	1.96	2.11	1.94	1.64	1.3	1.11	1.10
Interest rate, SMEs	%	7.04	7.61	6.18	6.52	6.36	5.93	5.11	4.69	3.95	3.63	3.62	3.82
Interest rate, large firms	%	6.27	6.81	5.62	5.98	5.81	5.50	4.87	4.51	3.79	3.40	3.31	3.45
Interest rate spread	%	0.76	0.79	0.56	0.54	0.55	0.43	0.24	0.18	0.16	0.24	0.31	0.37
Rejection rate	%, 1-(SME loans authorised/ requested)	..	..	..	..	..	..	..	6.90	3.70	12.20	12.90	15.50
Non-bank finance
Venture and growth capital	KRW billions	992	725	867	1 091	1 261	1 233	1 385	1 639	2 086	2 150	2 380	3 425
Venture and growth capital (growth rate)	%	..	-26.9	19.7	25.8	15.6	-2.2	12.3	18.4	27.2	3.1	10.7	43.9
Leasing and hire purchases	KRW trillions	10.3	11.7	7.1	10.6	11.1	10.5	11.9	13.2	15.0	17.4	20.2	21.2
Other indicators
Payment delays, SMEs	Number of days past due date	11.0	12.1	9.9	12.1	11.7	9.1	9.7	10.0	9.2	13.3	8.9	7.4
Bankruptcies, total	Number	2 294	2 735	1 998	1 570	1 359	1 228	1 001	841	720	555	494	469
Bankruptcies, growth rate	Year-on-year growth rate, %	..	19.2	-26.9	-21.4	-13.4	-9.6	-18.5	-16.0	-14.4	-22.9	-11.0	-5.1

Source: See Table 26.6.

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%).

Table 26.2. Distribution of firms in Korea, 2017

Establishment size (employees)	Number of establishments	%	Employment	%
All Establishments	4 019 872	100.0	21 626 904	100.0
SMEs (1-299)	4 015 849	99.9	18 464 334	85.4
Micro (1-9)	3 695 031	91.9	8 836 861	40.9
Small (10-49)	275 776	6.9	5 260 131	24.3
Medium (50-299)	45 042	1.1	4 367 342	20.2
Large (300+)	4 023	0.1	3 162 570	14.6

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.

Figure 26.1. Lending to SMEs and large enterprises, 2001-2018

KRW trillions

Source: Financial Supervisory Service (FSS), Ministry of SMEs and Startups (MSS).

Statlink

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.

Figure 26.2. Loan interest rate on loans for SMEs and large firms in Korea, 2007-18

Source: Bank of Korea (BOK).

Statlink

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.

Table 26.3. Venture and growth capital in Korea

KRW billion

Stage	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Early	365.0	290.8	247.6	319.2	372.2	369.6	369.9	504.5	647.2	790.9	779.6	981.0
Expansion	377.4	255.3	260.1	290.4	329.6	313.7	325.9	406.9	582.8	615.6	664.1	1 193.5
Later	249.3	178.6	359.4	481.4	559.0	550.0	688.7	727.9	855.8	743.8	936.6	1 250.4
Total	991.7	724.7	867.1	1 091.0	1 260.8	1 233.3	1 384.5	1 639.3	2 085.8	2 150.3	2 380.3	3 424.9

Source: Korea Venture Capital Association, “Venture Capital Market Brief”, 2017.01-2017.12.

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.

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”.

Table 26.4. Korean government’s ‘Innovation Venture Capital Fund’ plan, 2018-20

KRW trillion

	2018			2019			2020			Total
Total	Public	Private	Total	Public	Private	Total	Public	Private
Innovation Startup Fund	0.6	0.3	0.3	0.7	0.4	0.3	0.7	0.4	0.3	2.0
Growth Support Fund	2.0	0.8	1.2	3.0	0.9	2.1	3.0	0.9	2.1	8.0
Total	2.6	1.1	1.5	3.7	1.3	2.4	3.7	1.3	2.4	10.0

Source: Ministry of Strategy and Finance.

Box 26.1. Definition of SMEs used in Korea’s SME and entrepreneurship finance scoreboard

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

Table 26.5. Definition of SMEs used by BOK and FSS

Sector1	SMEs	Small Business	Micro- enterprises
	Average Sales(billion)	Average Sales(billion)	No. of Workers
wearing apparel, clothing accessories and fur articles	Less than 150	Less than 12	Less than 10
leather, luggage and footwear
basic metals
electrical equipment
Furniture
pulp, paper and paper products		Less than 8
food products	Less than 100	Less than 12
coke, briquettes and refined petroleum products
chemicals and chemical products; except pharmaceuticals and medicinal chemicals
fabricated metal products, except machinery and furniture
electronic components, computer; visual, sounding and communication equipment
other machinery and equipment
motor vehicles, trailers and semitrailers
Electricity, gas, steam and air conditioning supply			Less than 5
Water supply
Mining and quarrying		Less than 8	Less than 10
tobacco products
textiles, except apparel
wood and of products of wood and cork; except furniture
rubber and plastics products
other transport equipment
Construction
Agriculture, forestry and fishing			Less than 5
Wholesale and retail trade		Less than 5
beverages	Less than 80	Less than 12	Less than 10
pharmaceuticals, medicinal chemical and botanical products
other non-metallic mineral products
Printing and reproduction of recorded media		Less than 8
medical, precision and optical instruments, watches and clocks
Other manufacturing
Transportation and storage
Information and communication		Less than 5	Less than 5
Water supply; sewage, waste management, materials recovery; except water supply		Less than 3
Professional, scientific and technical activities	Less than 60	Less than 3	Less than 5
Business facilities management and business support services; except rental and leasing activities
Arts, sports and recreation related services
Maintenance and repair services of industrial machinery and equipment		Less than 1	Less than 10
Human health and social work activities			Less than 5
repair and other personal services
Financial and insurance activities	Less than 40	Less than 8
Real estate activities		Less than 3
Rental and leasing activities
Accommodation and food service activities		Less than 1
Education

Note: 1. General Criteria (Article 2 of Framework Act on SMEs and Article 3 of Enforcement Decree of the Act). For micro-enterprises, Article 2 of the Act of the Protection of and Support for Micro-enterprises shall apply.

Figure 26.3. Trends in SME and entrepreneurship finance in Korea

Source: See Table 26.6.

Statlink

Table 26.6. Definitions and sources of indicators for Korea’s Scoreboard

Indicators	Definition	Source
Debt
Outstanding business loans, SMEs	Bank(Commercial Bank+Specialized bank) loans to non financial SMEs, amount outstanding, stocks. KRW trillions	Financial Supervisory Service (FSS)
Outstanding business loans, total	Business bank(Commercial Bank+Specialized bank) loans to all non-financial enterprises, amount outstanding, stocks, KRW trillions	Financial Supervisory Service (FSS)
Outstanding short-term loans, total; loans for operation	Outstanding amounts, loans of less than one year, KRW trillions.	Financial Supervisory Service (FSS)
Outstanding long-term loans, total; loans for equipment	Outstanding amounts, loans of greater than one year, KRW trillions.	Financial Supervisory Service (FSS)
Government loan guarantees, SMEs	Value of loans guaranteed by KODIT, KIBO; stocks, KRW trillions	Korea Credit Guarantee Fund (KODIT), Korea technology finance corporation(KIBO)
Direct government loans, SMEs	Direct government loans supplied by SBC only, KRW billions.	Small & medium Business Corporation (SBC)
Non-performing loans, total	Percentage of Total Non-Performing Loans of Domestic Bank (Commercial Bank+Specialized bank). In, Korea, NPL is a sum of loans classified as substandard, doubtful, and presumed loss.	Financial Supervisory Service (FSS)
Non-performing loans, SMEs	Percentage of SME Non-Performing Loans of Domestic Bank (Commercial Bank+Specialized bank). In, Korea, NPL is a sum of loans classified as substandard, doubtful, and presumed loss.	Financial Supervisory Service (FSS)
Interest rate, SMEs	Average interest rates charged on new SME loans during the period	Bank of Korea (BOK)
Interest rate, large firms	Average interest rates charged on new large firms loans during the period	Bank of Korea (BOK)
Interest rate spread (between average rate for SMEs and large firms)	SME loan rate - Large corporation loan rate.	Bank of Korea (BOK)
Interest rate, large firms	Average interest rates charged on new large firms loans during the period	Bank of Korea (BOK)
Rejection rate	Percentage of SMEs (firms with 5-299 employees) applied for new bank loan but was rejected.	Industrial Bank of Korea (IBK), SME Financing Survey
Non-bank finance
Venture and growth capital	Annual amounts invested including early, expansion and later stages.	Korean Venture Capital Association(KVCA)
Leasing and hire purchases	New production of leasing and hire purchases in one year, flows, KRW trillions	The Credit Finance Association
Other
Payment delays, SMEs	Average days of delay past loan contract date.	Ministry of SMEs and Startups (MSS)
Bankruptcies, total	Bankrupt firms in Small Business Corporation’s portfolio.	Bank of Korea (BOK)

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:

https://www.k-vic.co.kr/eng/

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:

http://research.ibk.co.kr/research/board/finance-state/list