Bank Non-Performing Loans Hit 17.7 Trillion Won, Highest in 7 Years... Warning Signals for Corporate and Self-Employed Loans

Largest Since Q2 2019
Corporate Loan Delinquencies Widen; Up 1 Trillion Won from Previous Quarter
NPL Write-Offs and Sales Decline, Pushing Up Outstanding NPL Balance

The volume of non-performing loans (substandard and below) held by domestic banks has risen to 17.7 trillion won, marking the highest level since the second quarter of 2019. This deterioration in the banks' asset quality indicators is attributed to an increase in both corporate and household borrowers unable to repay their debts amid prolonged economic slowdown and high interest rates, as well as a reduction in the scale of non-performing loan disposals.

According to the "Status of Non-Performing Loans at Domestic Banks as of the End of March 2026 (Provisional)" released by the Financial Supervisory Service on May 29, the volume of non-performing loans in the banking sector stood at 17.7 trillion won at the end of the first quarter of this year. This represents an increase of 1.1 trillion won from the previous quarter and is the highest level since the second quarter of 2019 (17.5 trillion won). Substandard and below loans are defined as delinquent loans overdue by more than three months with a low likelihood of recovery.

The non-performing loan (NPL) ratio also climbed to 0.60%, up 0.03 percentage points from 0.57% at the end of last year. This is the highest level in five years since March 2021 (0.62%).

The rise in non-performing loans was mainly driven by corporate loans. Non-performing corporate loans amounted to 14.2 trillion won, an increase of 1 trillion won from 13.2 trillion won at the end of the previous quarter. In fact, most of the overall NPL increase (1.1 trillion won) originated from corporate loans. The non-performing loan ratio for corporate loans also rose by 0.04 percentage points to 0.74% compared to the previous quarter. Breaking it down further, the NPL ratio for large corporations increased by 0.01 percentage points to 0.50%, while that for small and medium-sized enterprises rose by 0.05 percentage points to 0.88%.

The quality of loans to individual business owners also deteriorated rapidly. The NPL ratio for loans to individual business owners surged by 0.09 percentage points from the previous quarter to 0.66%, the largest increase among key categories. The NPL ratio for small business corporations remained above the 1% level at 1.03%.

Non-performing household loans also increased. The volume of non-performing household loans rose by 200 billion won from the previous quarter to 3.3 trillion won. The NPL ratio for household loans increased by 0.01 percentage points to 0.32%. The NPL ratio for mortgage loans climbed by 0.01 percentage points to 0.22%, while the NPL ratio for other unsecured loans such as credit loans rose by 0.02 percentage points to 0.66%, marking the highest level since the first quarter of 2015.

These trends are attributed to a combination of factors, including the prolonged period of high interest rates and sluggish domestic demand, which have increased the repayment burden on self-employed individuals and small and medium-sized enterprises, as well as a contraction in the scale of non-performing loan write-offs and sales. While new non-performing loans generated in the first quarter totaled 5.5 trillion won, down 400 billion won from the previous quarter, the volume of NPL disposals fell by 1.3 trillion won to 4.4 trillion won.

In particular, the amount of NPL write-offs and sales plummeted from 4.1 trillion won in the fourth quarter of last year to 2.9 trillion won in the first quarter of this year. A Financial Supervisory Service official explained, "The outstanding balance of non-performing loans increased due to factors such as the decline in the scale of write-offs and sales during the first quarter."

The loan loss reserve ratio, which indicates the banking sector's capacity to absorb losses, also continued to decline. As of the end of March this year, the outstanding balance of loan loss reserves was 26.7 trillion won, unchanged from the previous quarter, but the loan loss reserve ratio fell to 150.4%. This represents a 9.9 percentage point decline from the previous quarter and a 20.1 percentage point drop from the same period last year, marking the lowest level since the COVID-19 pandemic. The fact that non-performing loans are rising quickly while reserve accumulation remains stagnant suggests that the banking sector's ability to respond to bad loans is weakening.

A Financial Supervisory Service official stated, "We plan to closely monitor the trends in non-performing loan and delinquency ratios given the ongoing domestic and external uncertainties," adding, "We will review each bank's reserve accumulation status and seek to strengthen asset quality management through proactive write-offs and sales of non-performing loans."

The increase in non-performing loans is an unfavorable development for the Korean economy, as it signals a deterioration in the repayment capacity of corporations. In reality, the proportion of domestic companies unable to cover even interest payments with their operating profits—so-called marginal firms—has been rising rapidly. According to the Bank of Korea, the recent ratio of marginal firms (as of September 2025) stood at around 17%, the highest on record. Marginal firms are defined as companies that have been unable to cover interest expenses with operating profits for more than three consecutive years.

The problem is that interest rates may rise further in the future. If interest rates increase, the interest burden on borrowers will grow, heightening the risk of higher delinquency rates, especially among small and medium-sized enterprises and self-employed individuals. Ultimately, this could lead to a further increase in non-performing loans in the banking sector, exacerbating asset quality problems.

Yongjin Seo, Professor of Business Administration at Sangmyung University, commented, "Given the high proportion of variable-rate loans in Korea, an increase in interest burden directly translates into a decline in borrowers' ability to repay principal and interest. This is likely to push up delinquency rates, particularly among vulnerable borrowers such as the self-employed, SMEs, and multiple debtors." He added, "Moreover, if this is compounded by adjustments in asset prices such as real estate, there is a risk of a vicious cycle—declining collateral values leading to lower recovery rates and, eventually, a deterioration in financial institutions' asset quality."

This content was produced with the assistance of AI translation services.