Small business sales in South Korea rose 4.53 percent in the second quarter from a year earlier, but profit margins fell for a second straight quarter as costs increased faster, an analysis showed. The amount of overdue debt on loans to sole proprietors also rose for a second consecutive quarter, it said.

Korea Credit Data (KCD) released its "Korea Credit Data Small Business Trends Report" on Tuesday, analysing business conditions for small businesses nationwide in the second quarter.

The report was written based on a sample selected from businesses nationwide that use the management service Cash Note. For the financial analysis, it used data from sole proprietor credit rating agency Korea Evaluation Information.

The report showed average second-quarter revenue per small business was 47.11 million won, up 4.53 percent from a year earlier. Average spending rose 5.83 percent over the same period to 35.22 million won, outpacing the rate of sales growth.

Average profit was 11.89 million won, up 0.85 percent. The profit margin therefore fell 0.92 percentage points from a year earlier to 25.2 percent.

On a year-earlier basis, the profit-margin decline extended to a second straight quarter. The margin fell 1.09 percentage points in the first quarter from a year earlier and dropped another 0.92 percentage points in the second quarter. Sales, by contrast, rose 1.89 percent in the first quarter and 4.53 percent in the second. Much of the sales increase was absorbed by higher costs, meaning it did not lead to improved profitability.

Compared with the previous quarter, second-quarter sales rose 10.64 percent and profit increased 19.02 percent, while the profit margin gained 1.78 percentage points. KCD analysed that the difference in seasonal factors between the first and second quarters affected the figures.

Along with weakening profitability, the debt burden on sole proprietors is also growing.

Outstanding loans to sole proprietors in South Korea totalled 735.8 trillion won in the second quarter. Banks accounted for 433.6 trillion won, or 58.9 percent of the total, and non-bank lenders held 302.2 trillion won. Within the non-bank sector, mutual finance loans were the largest at 237.7 trillion won.

Outstanding bank loans to sole proprietors rose slightly to 433.6 trillion won in the second quarter from 433.3 trillion won in the first. Non-bank lenders increased to 302.2 trillion won from 299.0 trillion won over the same period.

Delinquent amounts on sole proprietors' loans stood at 15.2 trillion won, up 4.3 percent from the previous quarter. It rose for a second consecutive quarter following the first quarter. The share of delinquencies relative to outstanding loan balances was relatively high at 5.7 percent for savings banks and 3.5 percent for mutual finance lenders.

Asset quality for sole proprietor lending at regional banks also worsened compared with the five major banks - KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup Bank. The second-quarter delinquency rate for sole proprietor loans at Busan Bank, Kyongnam Bank, iM Bank, Gwangju Bank and Jeonbuk Bank was 0.79 percent, about 1.8 times the 0.44 percent at the five major banks.

The year-on-year increase rate of the delinquency rate was also higher at regional banks, at 11.3 percent, about 4.9 times the 2.3 percent at the five major banks.

The report analysed that while the share of unsecured credit loans to sole proprietors at regional banks expanded to up to about three times that of the five major banks, internet-only banks absorbed relatively sound borrowers centred on secured loans, leaving more vulnerable borrowers at regional banks.

Ye-won Kang (강예원), head of data at KCD, said, "Compared with the same quarter a year earlier, sales increased but spending grew faster, so profit margins fell for a second straight quarter." She added, "This is a serious signal that a trend is taking hold in which small businesses' operations do not remain as current profits."