Marginal companies on rise: BOK

The number of marginal companies stuck in the financial quagmire with little room for profitability growth has been on the rise, further bogging down the economy as it anticipates rate hikes, the Bank of Korea said on Thursday.

Korea refers to firms with interest costs outweighing operating profits for at least three consecutive years as “marginal companies.”

The number of such firms in 2016 came to 3,126, taking up 14.2 percent of all Korean non-financial firms subject to external audits, according to the BOK on Thursday.

The figure saw a first decline in six years, but the central bank said the figure “virtually continued to grow,” considering nearly 50 percent of increase in the marginal companies that shut down in 2016.

On the other hand, the number of the marginal firms in 2015 with operating profit outnumbering interest expense fell by 5.5 percent.

Shin Woon, head of Financial Stability Department of the BOK, said such chronic debts is a “cause of concern to both the central bank and the government.”

“Many of the marginal firms have been labeled as such for over seven years,” Shin said, citing data that nearly a quarter of the marginal firms could not cover interest expenses with operating profits for nine consecutive years until 2016. “Moreover, loans from the financial institutions are not being paid back.”

He added such firms “will see their liabilities to repay interests inflate and pressure heighten, if a rate hike takes place.”

Shin pointed to the propensity of those firms -- with over one-fourth of them in the construction and properties industry -- to “hang on to” collaterals they put up for loans, making it unnecessary to promptly repay loans.

Meanwhile, the BOK highlighted the increase in the number of “vulnerable debtors” and the volume of debt they hold.

The central bank defined “vulnerable debtors” as those who borrowed loans from at least three financial institutions, while either holding bad credit – those with a credit score lower than 7 on the scale of 1 to ten -- or earning a low income -- in an income group comprising the bottom 30 percent.

As of 2017, the volume of loans extended to the individuals came to 82.7 trillion won ($77.6 million), up 5.4 percent on-year. This accounted for 6 percent of the entire household loans in Korea.

The number of such borrowers came to 1.5 million in 2017, up 2.3 percent on-year.

The BOK said in a statement the rate hikes will increase repayment pressure of individuals that are least likely to repay and have an impact on the fiscal soundness of the nation.

But Byun Seung-sik, head of Financial Stability Planning & Coordination Team at BOK, said Thursday the increase does not necessarily mean an inefficiency of the state-led measures to curb national household debt that went into effect last year.

By Son Ji-hyoung 
(consnow@heraldcorp.com)