Bank Loan Delinquency Rate Hits Highest Since October 2016... Red Alert for SME Lending

Won-Denominated Loan Delinquency Rate Hits 0.67%, Highest Since October 2016
SME Delinquency Rate Reaches Highest Level Since 2015
Concerns Over Financial Soundness Amid Corporate Loan Expansion and Economic Slowdown

As of the end of May, the delinquency rate for won-denominated loans at domestic banks rose to its highest level in about 10 years. This is largely attributed to continued economic slowdown and the burden of high interest rates, while factors such as rising costs caused by the high exchange rate have also worsened repayment conditions for corporate borrowers. Since the beginning of this year, bank corporate loans have increased due to the expansion of productive finance. At the same time, the burden of interest costs has grown recently, which has led to speculation that the delinquency rate could rise further in the future.

According to the Financial Supervisory Service on the 22nd, the delinquency rate for won-denominated loans at domestic banks stood at 0.67% at the end of May, up 0.06 percentage points from the previous month (0.61%). This is the highest level since October 2016, when the rate stood at 0.81%. The delinquency rate is calculated based on loans with principal and interest overdue by more than one month.

There has been an increase in new delinquencies and a decrease in the resolution of non-performing loans. The amount of new delinquent loans in May was 3.3 trillion won, up 400 billion won from the previous month, while the amount of non-performing loans resolved was 1.5 trillion won, down 100 billion won from the prior month.

As a result, the new delinquency rate rose to 0.13%, an increase of 0.01 percentage points from the previous month (0.12%). The new delinquency rate, which climbed to 0.14% in May of last year, had dropped to 0.11% at the beginning of this year but has been on the rise again since March.

By loan segment, the increase in the delinquency rate was largest for corporate loans. The delinquency rate for corporate loans stood at 0.84% in May, rising 0.10 percentage points from the end of the previous month (0.74%).

The delinquency rate for small and medium-sized enterprise (SME) loans, including loans to small corporations and individual business owners, was 1.00%, up 0.10 percentage points from the previous month's 0.90% and marking the highest level since May 2015 (1.11%). The delinquency rate for large corporate loans also reached this year’s high of 0.27%, up 0.05 percentage points from the previous month.

The delinquency rate for household loans was 0.45%, up 0.03 percentage points from the previous month but down 0.02 percentage points from the same month last year. The delinquency rate for mortgage loans rose 0.01 percentage points to 0.31% compared to the previous month, while the delinquency rate for household loans other than mortgages, such as unsecured loans, increased by 0.07 percentage points to 0.90%.

The problem is that recent base rate hikes have further increased the interest expenses for vulnerable borrowers. Not only is the burden of high interest rates persisting, but as the business environment for companies continues to decline, concerns are growing that the delinquency rate may rise further. The worsening business conditions for companies is also reflected in recent statistics. According to the “Analysis of Business Closures and Survey on Closed Small Business Owners” released by the Ministry of SMEs and Startups, the number of individual and corporate businesses that closed last year reached 975,681, with the business closure rate recorded at 8.64%.

There are also projections that the banking sector’s expansion of productive finance to extend more loans to innovative companies and SMEs, starting this year, could increase the burden of managing financial soundness going forward. This is because these companies often have lower liquidity and creditworthiness than large corporations, so if the economic slowdown or high interest rates persist, their business environment could deteriorate and delinquencies could rise quickly. In addition, considering the recent surge in “Bitu” demand—loans taken out for investment—household lending has quickly increased. Therefore, if a stock market correction continues for an extended period, the household delinquency rate could also rise further in a delayed fashion.

An official from the Financial Supervisory Service stated, "With the delinquency rate continuing its upward trend, there is a need to prepare for the possibility that this trend could accelerate given the increase in corporate loans driven by productive finance and changes such as rising interest rates."

The Financial Supervisory Service announced plans to strengthen soundness management by encouraging banks to proactively dispose of and sell off non-performing loans and accumulate sufficient capital and loan loss provisions to enhance their loss-absorbing capacity.

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