Business Debts Surge Due to Coronavirus Crisis

Businesses took out W69 trillion worth of loans in the second quarter to stay afloat amid the coronavirus epidemic (US$1=W1,189). That was the largest increase in quarterly debt since the first quarter of 2008. But not everyone is borrowing to stay alive. Others are taking advantage of ultra-low interest rates to buy stocks, hoping to strike it rich.

The Bank of Korea said Wednesday that the credit loan balance businesses borrowed stood at W1.3 quadrillion at the end of the second quarter, up W69.1 trillion from the first. In the first quarter, loans increased by W51.4 trillion, which was the previous record.

Some 68 percent or W47.2 trillion of the increased debt was taken out by small business owners in the wholesale and retail and hospitality sectors. A closer look at the use of money borrowed by large companies showed that W52.1 trillion was used to cover operating costs and W17 trillion to finance facilities. Operating costs consist of payroll and raw material costs, and 75 percent of businesses borrowed money for that purpose.

Under normal circumstances, businesses borrow money for investment, but these days they are borrowing just to stay open as sales have plummeted amid the epidemic. The BOK said the increased borrowings can be partially attributed to eased borrowing conditions for businesses amid the epidemic, but most of the loans were taken out just to survive.

According to bank industry data, the total credit loan balance of individual customers at Korea's five largest lenders -- KB Kookmin, Shinhan, Woori, Hana and NH Nonghyup banks -- stood at W124.3 trillion as of the end of August, up W4.76 trillion compared to July and the highest increase ever in a month.

Credit loans have surged because the government made it difficult to take out housing loans. They began to surge in June, when the government began rolling out a series of regulations aimed at curbing real-estate speculation.

The credit loan balance at commercial banks remained between W113 trillion and W114 trillion from March to May but then jumped to W117.5 trillion in June and W120.2 trillion in July. Many people appear to have taken out credit loans to buy homes once mortgage loans became more difficult to obtain.

One staffer at a commercial bank said, "Interest on credit loans fell to one to two percent, which is cheaper than mortgages. The borrowed money was probably used not only to buy real estate but also to buy stocks and for living expenses."

Demand for loans has also soared because of the booming local stock market. The credit loan balance at brokerages, a key indicator of how much investors are borrowing to invest in stocks, reached W16.22 trillion as of the end of August, up 2.5 times from March.

As a result, the BIS ratio of banks, which gauges of their financial health, continued to decline for three straight quarters, from 15.25 percent during the last three months of 2019 to 14.72 percent from January to March of this year. It fell even further to 14.53 percent in the second quarter.

One financial industry source said, "Commercial banks say their BIS ratios are stable at about 15 percent, but things may only look good on the surface due to rollovers of debt taken out during the coronavirus pandemic."