The government has emphasized “productive finance,” redirecting funds from household loans to businesses, leading to a rapid increase in corporate loans from banks. Investment demand in the semiconductor and artificial intelligence (AI) sectors has also driven loan growth. However, the trend of corporate loan growth, led by small and medium-sized enterprises (SMEs) until last year, has shifted to large corporations this year. While increased loans have flowed more into operational costs than equipment investment, newly generated non-performing corporate loans have concentrated on SMEs.
◇Corporate Loan Growth Shifts from SMEs to Large Corporations
According to the Bank of Korea, corporate loan balances in the banking sector reached 1,430.8 trillion Korean won as of the end of August, an increase of 9.7 trillion Korean won from the previous month. Loans to large corporations rose by 4.9 trillion Korean won, while SME loans increased by 4.8 trillion Korean won, with large corporations showing a larger growth margin. This was influenced by funding demands for corporate bond repayments and banks’ expanded corporate loan operations.
The cumulative data reveals a clearer shift in funding flows. Last year, SME loans increased by 28.4 trillion Korean won, surpassing large corporate loan growth (20.4 trillion Korean won) by 8 trillion Korean won. In contrast, this year, large corporate loans grew by 34.2 trillion Korean won, exceeding SME loan growth (32.7 trillion Korean won) by 1.5 trillion Korean won. The increase in large corporate loans over eight months already reached 1.7 times the annual growth of last year.
The same trend appeared in the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup). Their corporate loan balances as of the end of August stood at 883.9647 trillion Korean won, increasing by 6.2562 trillion Korean won in a month. Of this, large corporate loans accounted for 3.7196 trillion Korean won, or 59.5% of the total increase. SME loans grew by only 2.5367 trillion Korean won.
The rise in large corporate loans aligns with expanded investments in semiconductors and AI. Building data centers and semiconductor production lines requires massive funding, and large corporations, with higher creditworthiness and repayment capabilities, make it easier for banks to extend loans. In its ‘Revised Economic Outlook’ released last month, the Korea Development Institute (KDI) raised its equipment investment growth forecast for this year from 3.3% to 7.9%, reflecting global AI infrastructure investments and semiconductor production facility expansions.
However, the semiconductor boom has not evenly benefited all businesses. According to the Bank of Korea’s estimates of 26,509 externally audited companies, the operating profit margin in the second quarter was 16.9%, a record high, but dropped to 6.2% when excluding Samsung Electronics and SK Hynix. KDI also assessed that investment in sectors other than semiconductors remains weak. In such a situation, where disparities in corporate performance and investment capabilities are significant, bank funds tend to flow to a few large corporations with confirmed profitability and repayment abilities.
◇Operating Funds Share Rises from 61% to 78%… Non-Performing Loans Concentrate on SMEs
The purpose of funds supplied to corporations shows mixed effects of productive finance. In the second quarter, industrial loans from deposit-taking institutions increased by 30.6 trillion Korean won from the previous quarter. Of this, operating funds—used for raw material purchases, wage payments, and short-term debt repayments—accounted for 23.8 trillion Korean won, or about 78%. Facility funds, allocated to factory construction or machinery and equipment purchases, increased by 6.9 trillion Korean won.
Operating funds are essential for normal business activities, such as raw material purchases and wage payments, so they cannot be simply labeled as unproductive loans. However, it is notable that the recent increase in corporate loans has been directed more toward sustaining immediate business operations than expanding facilities. In the second quarter of last year, operating funds accounted for 8.8 trillion Korean won (about 61%) of the 14.5 trillion Korean won increase in industrial loans, while facility funds were 5.7 trillion Korean won (about 39%). This year, operating funds surged to 23.8 trillion Korean won, raising their share to about 78%, while facility funds remained at 6.9 trillion Korean won (about 22%). Over a year, operating funds increased by 15 trillion Korean won, tripling, while facility funds grew by only 1.2 trillion Korean won. This is attributed to SMEs, struggling with weak domestic demand, prioritizing securing funds for labor costs and raw material payments or extending existing loans over expanding factories or facilities.
Non-performing loans also concentrated on SMEs. According to the Financial Supervisory Service, newly generated corporate non-performing loans in the first half of this year amounted to 9.8 trillion Korean won. Large corporate non-performing loans were 2 trillion Korean won (20.4% of the total), while SME non-performing loans were 7.8 trillion Korean won (79.6%).
The severity of non-performing loans was also higher among SMEs. The non-performing loan ratio—the proportion of loans overdue by three months or more, with low recovery potential—was 0.92% for SMEs as of the end of June, about 1.7 times the 0.53% for large corporations. This means that for every 1 million Korean won lent to SMEs, approximately 9,200 Korean won was classified as a non-performing loan. Total non-performing loans in domestic banks reached 18.9 trillion Korean won, the highest in eight years since June 2018, with corporate loan-related non-performing loans accounting for 15.2 trillion Korean won (over 80%). While large corporations led corporate loan growth this year, the burden of non-performing loans concentrated on SMEs.
Kim Tae-seok, president of the Korean Accounting Information Society and professor at Baekseok University’s College of Business, stated, “If corporate loans concentrate only on large corporations, the effects of productive finance cannot spread across industries.” He added, “The government and banks should increase funding support to enable SMEs with growth potential to invest in factories and facilities.”
