SME policy loan delinquency tops 2% as maturity-extension illusion ends

Delinquency on small and medium-sized enterprise (SME) policy loans has surged past 2% to its highest level in five years. Analysts say the potential bad loans that financial authorities and policy finance institutions had held back with maturity extensions and repayment deferrals during the COVID-19 pandemic are now materializing as a full-blown deterioration in asset soundness.

According to data the Ministry of SMEs and Startups (MSS) submitted to the National Assembly on Oct. 29, delinquency rates on major policy funds operated by the Korea SMEs and Startups Agency (Chairman Kang Seok-jin) jumped across the board as of the end of September. The delinquency rate on the innovative startup commercialization fund, which helps early-stage companies build their foundations, soared to 2.34%. The rate had fallen from 1.73% in 2021 to 0.89% in 2023, but rebounded to 1.29% in 2024 and 1.52% in 2025 as maturity extensions began to expire, and has now shot well past the 2% mark this year.

The delinquency rate on the re-startup support fund, which encourages business transformation and structural improvement, also re-entered the 2% range at 2.14%. In addition, delinquency reached 1.73% on emergency management stabilization funds, 1.46% on new market entry support funds and 1.06% on new growth base funds, with key policy fund indicators all tracing a steep upward curve.

The main cause of the deteriorating indicators is that the structural bill for policies that had been postponed through liquidity support and maturity extensions has come due all at once. At a National Assembly audit on Oct. 15, Chairman Kang explained that as maturity extensions on loans issued during COVID-19 are sequentially completed, the bad loans of companies that have exhausted their repayment capacity are being reflected in the statistics without any filtering. Critics say that during the deferral period, companies were unable to improve their fundamentals while interest costs and principal repayment burdens only accumulated.

Policy fund delinquency is rising more steeply than in the private financial sector. According to the Financial Supervisory Service, the delinquency rate on SME loans at Korean banks stood at around 1.00% as of the end of August. In detail, delinquency on loans to SME corporations was 1.10% and on loans to sole proprietors 0.86%, the highest in nine years and 10 months. As banks have continued to tighten corporate lending standards amid prolonged high interest rates and the economic slowdown, companies with weak credit that were pushed out of private lending channels have become excessively dependent on policy funds. But with delinquency surging even at policy finance windows, the threshold for additional support is bound to rise, raising concerns that a credit crunch will accelerate.

Even as bad loans surge, the preemptive restructuring function is not working properly. At the National Assembly audit on Oct. 15, lawmakers pointed out that despite the rise in policy fund delinquency, the Korea SMEs and Startups Agency's debt restructuring support performance has actually been declining. Due to the pressure of lump-sum repayment and costs incurred upon business closure, a considerable number of companies are unable to shut down even in extreme situations and only keep growing their debt.

Whether policy authorities can move beyond stopgap measures centered on maturity extensions and strictly separate viable companies from those that should exit will be a key indicator for the future soundness of policy finance. Unless effective debt reduction and recovery infrastructure are swiftly activated, it will be difficult to prevent policy finance losses from spreading to the entire private credit market.

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.