As the cycle of raising the benchmark interest rate begins in earnest, the financial burden on small and medium-sized businesses and self-employed people suffering from the economic downturn and sluggish consumption is expected to increase. This is because the interest to be paid increases when the delinquency rate is already soaring.

According to the Financial Supervisory Service on the 17th, the delinquency rate of small and medium-sized companies in April this year was 0.9%, more than four times that of large companies (0.22%). In particular, the delinquency rate of small and medium-sized corporations, excluding individual businesses, was 0.98%, approaching 1%. Compared to April 2024, two years ago, it increased by 0.28 percentage points.

The rapid rise in the delinquency rate of small and medium-sized companies is interpreted as worsening corporate profitability. According to a recent financial stability report published by the Bank of Korea, 56.8 percent of the small and medium-sized Korean companies had an interest coverage ratio of less than 1 last year. The interest compensation ratio is the operating profit divided by the total interest expense, and the fact that this ratio is less than 1 means that the company cannot pay back the interest with the money it earns.

In addition, the financial conditions of vulnerable companies could worsen as interest rates rise. In the market, the observation that the Bank of Korea will raise its key interest rate by 0.25 percentage points on the 16th and raise it by the same amount by the end of the year is gaining momentum. According to the Korea Federation of Banks, the average interest rate on credit loans for small and medium-sized companies rated 7-10 by five major banks (Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup) was 12.6% per year in May, up 1 percentage point from the beginning of the year, which is likely to exceed 13% per year in the second half of this year.

In particular, as more companies choose variable-rate loans in recent years, the interest burden on SMEs as a whole is expected to increase. This is because the rate hike should be reflected as it is every time the variable rate is applied in the future. According to the Bank of Korea, 68.2 percent of companies opted for variable-rate loans in May, up more than 20 percentage points from 47.2 percent in May last year. The reason why the preference for variable interest rates has increased is because it has been advantageous over fixed interest rates for a while. Since October 2024, the benchmark interest rate has fallen three times, and companies had better choose variable interest rates to reflect the extent of the rate cut.

However, as the Bank of Korea is expected to raise interest rates by an additional 0.25 percentage point next month, the advantages of variable interest rates are expected to be diluted quickly.

[Reporter Park Changyoung]