With Rising Default Rates and a Slumping Real Estate Market, Banks’ Collateral Recovery Rates Halved

Bank NPL Sales Surge from 2.98 Trillion Won in 2021 to 8.12 Trillion Won in 2025

Collateral Value of Real Estate, Including Retail and Land, Plummets to 40–50% Range

Concerns Over Further Rise in Bank NPL Ratios in the Second Half of the Yea

As the real estate market cools, commercial banks are struggling to recover real estate-backed loans. Since the end of the COVID-19 pandemic, demand for commercial and industrial real estate has declined. At the same time, high interest rates and inflation have pushed delinquency rates higher, leading to an increase in the volume of foreclosed collateral. However, as the auction market stagnates and winning bid rates fall, it has become increasingly difficult to even sell properties at half of their appraised value.

According to the financial and legal sectors on June 3, the amount of non-performing loan (NPL) disposals by domestic banks increased from 2.98 trillion won at the end of 2021 to 8.12 trillion won at the end of last year (2025). This surge is attributed to banks intensively disposing of NPLs as concerns over rising delinquency rates and higher NPL ratios have raised issues regarding banks’ asset soundness. Data from the Financial Supervisory Service’s Financial Statistics System shows that banks’ NPL ratio dropped by 0.1 percentage point from 0.5% in 2021 to 0.4% in 2022. However, it has since been on the rise, reaching 0.47% in 2023, 0.54% in 2024, and 0.57% at the end of last year. The total NPL amount also increased from 11.77 trillion won in 2021 to 16.6 trillion won at the end of last year, up by 4.83 trillion won.

Drop in Real Estate Collateral Value... Appraised Values in Provinces Plunge to 40–50%

The key issue is that it has become difficult for banks to have collateral properly valued during NPL sales. NPL firms typically offer purchase prices based on winning bid rates (the ratio of winning bid to appraised value). For banks, declining winning bid rates mean they are forced to sell collateralized loans at lower prices or retain them on their books if they cannot be sold.

In fact, winning bid rates for real estate in Seoul and the six major metropolitan cities have fallen sharply. According to the Court Auction System, the winning bid rates for apartments in metropolitan cities other than Seoul exceeded 95% in 2021, but fell to 79.6–89.7% during January to April this year. In Incheon, the winning bid rate dropped from 111.7% in 2021 to 81% in the first four months of this year, a decrease of 30.7 percentage points.

For industrial and commercial real estate such as factories, neighborhood shopping centers, and land, some areas have seen winning bid rates fall by as much as 30–40%. In Seoul, the winning bid rates for factories, neighborhood shopping centers, and land were 103.2%, 102.8%, and 90.6% in 2021, but decreased to 100%, 71%, and 74.3% last year. Only factories have been sold at market prices, while neighborhood shopping centers and land have dropped to about 70% of market value. In the first four months of this year, excluding factories with only one winning bid, winning bid rates for neighborhood shopping centers and land were only 77.2% and 56.3%, respectively. The winning bid rate for neighborhood shopping centers was 102.8% in 2021 and 107.3% in 2022, but declined to 83.3% in 2023, 73.7% in 2024, 71% last year, and just 77.2% in the first four months of this year. The rate for land also fell from 103.1% in 2022 to 56.3% in the first four months of this year.

The situation is even more serious in regional areas. In Busan, winning bid rates for neighborhood shopping centers and land dropped from 72.8% and 101.8% in 2021 to 53.6% and 59.7%, respectively, in the first four months of this year. In Incheon, Daejeon, Daegu, Gwangju, and Ulsan, winning bid rates for neighborhood shopping centers fell from 66.8–74.5% in 2021 to 41–63.7% in the first four months of this year. For land, rates plunged from 78.9–122.1% during the same period down to 36–65.9%.

As delinquency rates rise, the number of properties put up for auction has increased, but the number of successful bids has not kept pace, resulting in lower successful bid ratios. According to Samil PwC’s NPL market trends report, the ratio of successful bids to auctioned properties dropped from 39.1% in the first quarter of 2022 to 23.0% in the fourth quarter of last year. For commercial real estate in particular, the ratio fell from 32.8% to 14.1% during the same period.

An executive in charge of loan operations at a major commercial bank stated, “These days, it is common for real estate collateral to fetch less than 50–60% of its value in the NPL market. For ultra-high-value properties worth more than 30 billion won, even NPL firms are not interested, so banks are simply holding onto these assets.”.

Stronger Real Estate Regulations, Rate Hikes in Second Half... Concerns Over Regional Bank Soundness 

With the trend of stricter real estate regulations continuing and interest rate hikes expected to begin in earnest in the second half of this year, there are concerns that the non-performing loan ratio will rise further and both winning bid and NPL sale rates could fall even more. This is expected to particularly affect the asset soundness of regional banks, which have strong ties to local economies.

As of the end of March, the NPL ratio at regional banks was 1.13%, up 0.11 percentage points from the end of last year. This is 0.53 percentage points higher than the overall NPL ratio of 0.60% for all 20 domestic banks, and 0.69 percentage points higher than the 0.44% ratio for commercial banks. A representative of a regional bank expressed concern, saying, “With the K-shaped economic growth, traditional industries are already struggling, and the stronger regulatory stance on real estate makes it difficult for winning bid and NPL sale rates to recover. The relatively weaker economies in regional areas mean the burden on regional banks will inevitably be greater.”

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