[Financial Stability Report] Non-Performing Loans at Domestic Banks Hit 17.7 Trillion Won, Highest in 7 Years...Sharp Rise in SME Delinquencies

Debt Repayment Capacity Weakened by Economic Slowdown and High Interest Rates

Number of Delinquent SME Borrowers Up 2.6 Times Compared to 2016

Non-performing loans at domestic banks have increased to their highest level in seven years. This surge is attributed to the recent economic slowdown and high interest rates, which have weakened the debt repayment capacity of small and medium-sized enterprises (SMEs) and self-employed individuals.

According to the Financial Stability Report released by the Bank of Korea on June 24, 2026, the volume of non-performing loans (NPLs; loans delinquent for three months or longer) at domestic banks reached 17.7 trillion won as of the end of March this year.

This is the largest amount in seven years since 18.5 trillion won recorded in March 2019. In particular, the figure has continued to rise since September 2022, when it stood at 9.7 trillion won during the real estate project financing (PF) crisis.

Unlike the previous period of NPL expansion (2015–2016), when the increase in bad loans was mainly due to the restructuring of large shipbuilding and shipping companies, negatively impacting bank soundness, the current increase is largely driven by defaults on loans to SMEs and self-employed individuals. In particular, the delay in the recovery of the service sector—such as wholesale, retail, and real estate—has led to NPLs spreading across various industries, with a significant increase in the number of affected businesses.

Comparing the end of March 2016 to the end of March this year, the number of large corporate borrowers with one-month delinquencies declined from 118 to 68, while the number of delinquent SME borrowers increased by approximately 2.6 times, from 22,339 to 58,372.

Banks have also changed how they handle non-performing loans. Previously, they mainly disposed of collateral or restructured the loans, but recently, there has been a growing trend of transferring NPLs to specialized NPL companies. Last year, banks disposed of 22.3 trillion won in NPLs, with 14.8 trillion won (66.4%) involving SMEs. By method, 8.2 trillion won (36.7%) was disposed of through sales, 6 trillion won (27.1%) was written off, and 4.5 trillion won (20.4%) was collected through loan recovery.

The Bank of Korea noted that, as NPLs have rapidly expanded across various industries, banks have preferred sales over direct management. The share of collateralized loans among large corporates is 36.2%, compared to 67.0% for SMEs, which is cited as a factor encouraging purchases by specialized NPL firms.

The proportion of individual borrowers—including sole proprietors—rose sharply to 41.5% from 22.8% in 2015. The Bank of Korea attributes this to sluggish domestic demand and rising lending rates. The share of corporate borrower loan sales decreased from 77.2% to 58.5%. The share of industrial assets used as collateral also dropped from 59.1% in 2015 to 40.3%, while the share of commercial and residential assets rose from 20.5% and 11.7% in 2015 to 31.7% and 20.1%, respectively.

The Bank of Korea stated, "As market interest rates rise in the future, there is a high likelihood that non-performing loans will increase, especially among borrowers experiencing industry downturns and delayed recovery of repayment capacity. Banks must also prepare for the possibility that the disposal of NPLs may not proceed smoothly, due to a decline in demand for NPL purchases by specialized firms."

The report further emphasized, "Banks should pay close attention to the supply-demand conditions in the NPL sales market, diversify their methods for disposing of non-performing loans, and focus on proactive risk management."

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