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Stop the cash squeeze before it spreads

Published: 18 Apr. 2025, 00:00

The entrance to the Homeplus Yeongdeungpo Branch in Yeongdeungpo District, western Seoul, is seen on March 4.[NEWS1]

Korea’s small and mid-sized enterprises (SMEs) are facing a tightening credit crunch that could ripple through the broader economy if left unchecked. While major conglomerates are still holding steady despite trade headwinds from the United States, the financial strain on SMEs — the backbone of Korea’s employment and industrial base — is growing more severe.

Even companies with stable business structures are struggling to raise capital. The tipping point came with the Homeplus debacle, in which a private equity firm’s aggressive leveraged buyout and hasty sale of key assets spooked the bond market. Investors absorbed losses, and the resulting anxiety quickly spread. Now, even creditworthy SMEs are feeling the squeeze.

Banks have raised their lending thresholds. In March alone, corporate loans from the five major commercial banks fell by nearly 2.5 trillion won. Lending to large firms increased slightly, but loans to SMEs dropped by over 325 billion won. Companies that can’t access the bond market or secure bank loans are turning to the IPO market, only to find little relief there. So far this year, just eight companies have submitted preliminary listing applications, down from 25 in the same period last year.

The pressure will likely intensify. Roughly 70 trillion won in corporate bonds must be repaid or refinanced by the end of the year. If only large firms can tap the capital markets, smaller companies will struggle to survive — risking not just individual bankruptcies, but broader job losses and regional economic shocks. SMEs account for nearly 88 percent of Korea’s work force, employing close to 29 million people.

IBK Bank's headquarters in Jung District, central Seoul, is pictured in this photo taken on March 25. [NEWS1]

Retailers like Balan and JDX, along with provincial construction firms, are already facing mounting stress. With GDP growth expected to hover around zero this year, relief through lower interest rates would have helped. Yet the Bank of Korea chose to freeze its key rate at 2.75 percent, citing concerns about the won’s volatility and household debt.

The government and financial regulators cannot afford to wait. State-run banks should step in with credit guarantees. A supplementary budget must reflect this urgency. Bond market stabilization funds and policy-backed bond purchase programs should also be activated.

This is not a case of unproductive “zombie firms” asking for bailouts. Many SMEs are fundamentally sound but caught in a tightening financial vise. Without swift, targeted action, Korea could soon face a far deeper economic crisis.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.