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The number of South Korean companies facing heightened default risk has climbed to 437 as prolonged high interest rates and economic weakness continue to weigh on corporate finances, affecting both large companies and small and midsized firms.

According to the Financial Supervisory Service on Wednesday, 221 companies were classified as firms showing signs of financial distress through regular credit risk assessments conducted this year by creditor banks. Including additional quarterly assessments carried out when necessary, the total number of distressed firms this year reached 437.

This marks an increase of 46 companies from a year earlier, when the total stood at 391. By company size, 21 large firms with bank credit exposure of 50 billion won ($34.0 million) or more were classified as distressed, while 416 were smaller companies with credit exposure below that threshold. Compared with last year, the number of large firms rose by six and small and midsized firms by 40.

Distressed firms are defined as companies whose deteriorating profitability and liquidity make normal business operations difficult. Banks assess credit risk based on factors such as operating performance, cash flow and interest coverage ratios — calculated as operating profit divided by financial costs — and assign grades from A to D. Companies rated C or D are classified as distressed.

An official at the watchdog said prolonged high interest rates have weakened financial structures, particularly among marginal firms. The FSS said the delinquency rate on corporate loans rose to 0.61 percent as of the end of September, up from 0.52 percent a year earlier.

By industry, real estate accounted for the largest number of distressed firms at 38 based on regular assessments, followed by automobiles with 16, wholesale and brokerage services with 15, machinery and equipment with 12, rubber and plastics with 11, and electronic components with 10. Compared with a year earlier, the number of distressed firms increased in real estate and electronic components, while rubber and plastics and machinery and equipment saw declines.

Total bank credit exposure to distressed firms stood at about 2.2 trillion won, and is not expected to pose a significant threat to the soundness of domestic banks, the FSS said. Additional loan loss provisions required as a result of the classifications are estimated at around 186.9 billion won. The resulting impact on banks’ Bank for International Settlements capital ratios is expected to be minimal, with an estimated decline of 0.01 percentage point.

The watchdog said it plans to encourage swift follow-up measures for the distressed firms.