Alarm Over Small Construction Firms' Delinquency Rate... Fears of 'Domino Bankruptcies' Mount as Interest Rates Rise

Bank Construction Loan Delinquency Rate Remains Above 1%
— Twice That of General Corporates
Interest Coverage Ratio at 0.95: Unable to Cover Interest with Operating Profit
Wave of Bankruptcies Feared Among Regional Small Construction Firms as Interest Rates Rise

The delinquency rate for loans to small and medium-sized construction companies at major banks has surpassed 1%, signaling a prolonged deterioration in the construction sector's asset quality. Amid a downturn in the construction market, surging project costs, and the prospect of interest rate hikes in the second half of the year, concerns are mounting over a potential wave of bankruptcies among regional small and medium-sized construction firms facing liquidity shortages. Industry watchers are noting that financial institutions must accelerate their efforts to build up loan-loss reserves and strengthen risk management to brace for a further increase in bad construction-related loans.

IBK, Hana Bank, Shinhan Bank: Construction Loan Delinquency Rates in the 1% Range... Double That of General Corporate Loans

According to the financial sector on July 20, the average delinquency rate for construction loans at the four major banks—KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank—plus IBK Industrial Bank of Korea stood at 1.1% as of the end of March. This figure, which sat at 1.08% in March of last year, continues to remain above the 1% mark. Note that KB Kookmin Bank's figure is based on its total corporate loan book for the construction sector, while the other banks' rates reflect loans to small and medium-sized construction businesses.

At that time, the average delinquency rate for general corporate or SME loans at these five banks was approximately 0.6%, meaning the rate for construction loans is nearly twice as high. This highlights how loan defaults in the construction sector are more pronounced than in other industries.

By individual bank, IBK saw the highest delinquency rate for construction loans at 1.64%, up 0.30 percentage points from 1.34% in March of the previous year. Hana Bank's rate climbed from 1.31% to 1.44% during the same period, while Shinhan Bank's rose from 0.77% to 1.02%, also crossing the 1% threshold.

KB Kookmin Bank and Woori Bank, in contrast, reported construction loan delinquency rates of 0.93% and 0.49%, respectively, marking declines of 0.11 and 0.44 percentage points year-on-year—an indication of relative stability at these institutions.

An executive in charge of corporate lending at one of the banks commented, "The delinquency rate is still within manageable limits, but it is on the rise. Asset quality issues are particularly severe in the construction and petrochemical sectors, with the construction industry being the hardest hit. As the construction market downturn persists, the burden is spreading to other sectors as well."

"Unable to Cover Interest with Operating Profit"... Fear of 'Domino Bankruptcies' Among Regional Small Construction Firms as Rates Rise

The deterioration in the construction sector is largely attributed to a prolonged slump in regional real estate markets and growing inventory of unsold homes upon project completion, which has sharply weakened the liquidity of smaller construction companies that heavily rely on private housing projects. This is exacerbated by the ongoing high exchange rate and high interest rate environment stemming from war in the Middle East, leading to rising raw material and labor costs and an increasing project cost burden—further eroding profit margins. Although restructuring measures have been implemented in the real estate project financing (PF) market, business sites with low profitability and marginal companies continue to face difficulties in securing funding.

The number of construction companies unable to service even their interest payments through operating profit alone is rapidly increasing. According to a Financial Stability Report released by the Bank of Korea last month, the industry’s interest coverage ratio stood at 0.95 in 2025, meaning operating profit did not cover financial costs. An interest coverage ratio below 1 indicates that a company is unable to meet its financial obligations solely with operating profit.

The Bank of Korea stated, "Debt servicing capacity in the construction sector has deteriorated significantly, and with contingent liabilities from PF loan defaults also materializing, the delinquency rate remains high. Financial institutions should tighten lending standards and proactively block further deterioration, as the risks could spill over to the broader financial system during a period of rising interest rates."

The key concern is that the financial burden on construction companies is likely to grow even further due to additional interest rate hikes. The Bank of Korea raised its benchmark rate from 2.5% to 2.75% on July 16 and is expected to implement one or two more hikes this year. Small and medium-sized construction companies, which are heavily reliant on borrowed funds, will inevitably face even greater interest burdens. If paying down principal and interest becomes even more challenging, defaults will likely increase—especially among vulnerable business sites and regional firms—adding to banks’ burden of provisioning and asset quality management.

Management conditions in the construction industry are already worsening rapidly. According to the Construction Policy Research Institute, 1,088 construction companies closed in the first quarter of this year, a 17.6% increase year-on-year. At the end of 2024, out of 2,200 construction companies required to undergo external audit (with total assets of 50 billion won or more), 972—44.2%—had an interest coverage ratio below 1, and 86% of such companies were small and medium-sized enterprises.

Lee Eun-hyung, a research fellow at the Construction Policy Research Institute, commented, "Since the latter half of 2022, the high interest rate trend has continued to weigh on the construction sector, and recent rises in home prices are confined mainly to Seoul’s core areas and parts of the capital region, making it difficult to view this as an industry-wide recovery. As private construction demand, excluding apartments in Seoul, contracts, small and medium-sized firms are seeing reduced project volume and weaker cash flow, which could well lead to increased loan delinquencies." He added, "With a swift rebound in private construction demand unlikely and continued regulatory and demand suppression in the housing market, small and medium-sized construction companies with weak financial positions are likely to continue experiencing business difficulties for the time being."

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