[Financial Microscope] Rise in Delinquency Rates for Household and Small Business Loans Puts Major Banks' Asset Quality to the Test

Delinquency and NPL Ratios at Five Major Banks Near 0.4% at Q2 End

Average Household Loan Delinquency Rate Highest Since Q1 2016

Average Delinquency Rate for Small Business Loans at 0.58%

Banks Expand NPL Sales and Tighten Loan and Co

The delinquency rates and non-performing loan (NPL; bad debt) ratios at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup) remain elevated, especially for household and small business loans. With expectations that high interest rates and sluggish domestic demand will persist in the second half of the year, there are increasing observations that banks' risk management capabilities are being put to the test.

According to the financial sector as of July 29, the simple averages of the five banks’ delinquency and NPL ratios at the end of the second quarter stood at 0.394% and 0.396%, respectively. The delinquency rate dropped by 0.004 percentage points compared to the first quarter (0.398%), but the NPL ratio rose by 0.022 percentage points, marking the highest level in the last year.

By bank, Kookmin Bank’s delinquency rate fell from 0.35% in the first quarter to 0.27% in the second quarter, a decline of 0.08 percentage points. In contrast, Shinhan Bank and Hana Bank recorded increases of 0.02 and 0.01 percentage points respectively, reaching 0.34% and 0.40%. Woori Bank’s second quarter delinquency rate also rose to 0.43%, up 0.05 percentage points from the previous quarter. NongHyup Bank’s rate dipped 0.02 percentage points from the previous quarter to 0.53%, but it remains the only bank among the five with a delinquency rate exceeding 0.5%.

In terms of NPL ratios, Kookmin Bank and NongHyup Bank saw declines of 0.06 and 0.01 percentage points from the previous quarter, registering 0.28% and 0.52%, respectively. Meanwhile, Shinhan, Hana, and Woori banks all saw their NPL ratios rise. Shinhan Bank’s NPL ratio went up by 0.01 percentage points from 0.30% in the first quarter to 0.31% in the second quarter. Hana Bank and Woori Bank also saw increases of 0.11 and 0.06 percentage points, reaching 0.48% and 0.39%, respectively, during the same period. Notably, Hana Bank, which had the lowest NPL ratio among the five banks at 0.29% in the first quarter of last year, continued its upward trend and is now at its highest level in about seven years, since reaching 0.54% at the end of the first quarter in 2019.

Delinquency Rates on Household and Small Business Loans Rise... Capital Adequacy Pressure Grows

The sharp increase in delinquency rates for household and small business loans—both directly hit by high interest rates and sluggish domestic demand—is putting additional stress on banks’ financial soundness. The simple average delinquency rate for household loans at the five banks was 0.33%, an increase of 0.01 percentage points from 0.32% at the end of the first quarter. This marks the highest level since the end of the first quarter of 2016, when it was 0.36%—a ten-year high.

By bank, Hana Bank marked a record-high household loan delinquency rate of 0.32% since related statistics began. NongHyup Bank also recorded its highest level in 12 years at 0.48%, the highest since the second quarter of 2014 (0.54%). Woori Bank’s household loan delinquency rate rose to 0.31% at the end of the second quarter, up from 0.29% at the end of the first quarter. Kookmin Bank saw a marginal decline to 0.27% from 0.28% in the previous quarter, while Shinhan Bank maintained the same rate as the previous quarter at 0.25%.

The delinquency rate for small business loans also remains high. The simple average for small business loan delinquency at the five banks was 0.58% in the second quarter, the highest since the first quarter last year (0.59%). Woori Bank’s small business loan delinquency rate hit 0.75%, the highest since Fact Book data tracking began at the end of the first quarter in 2019. Shinhan Bank’s small business delinquency rate at the end of the second quarter was 0.49%, the highest in nine years since the end of the second quarter in 2017 (0.52%). In contrast, the rates at Kookmin Bank fell from 0.44% to 0.37%, Hana Bank declined from 0.61% to 0.59%, and NongHyup Bank decreased from 0.73% to 0.71%.

At the end of the second quarter, the total NPL balance at the five banks stood at 7.4331 trillion won, the largest since the end of the first quarter in 2018 (8.2143 trillion won). This is an increase of 1.0006 trillion won compared to the same period last year (6.4325 trillion won). The household loan NPL ratio rose from 0.23% at the end of last year to 0.25% by the end of the second quarter. The corporate loan NPL ratio also increased from 0.42% to 0.51% during the same period. Kookmin Bank's and Woori Bank's household loan NPL ratios in the second quarter were 0.21% and 0.22%, respectively—the highest since recording 0.22% and 0.23% in the second quarter of 2020.

Yonhap News Agency

Will High Interest Rates Drive Further Defaults? Banks Expand NPL Sales

The banking sector is on high alert for further increases in default rates as market and lending rates rise in line with the Bank of Korea’s continued monetary tightening. Lending rates are determined by adding bank funding costs and margins to the base interest rate. When the base rate climbs, banks’ funding costs rise, making it more likely that loan interest rates will also go up.

There are even market forecasts that the Bank of Korea could raise the base rate to the 3% range by the end of the year or early next year. In response, banks are focusing on internal collection and restructuring, while also expanding the market sale of bad debt to specialized NPL companies as a way to reduce default rates.

According to Samjong KPMG’s "NPL Market Trends and Outlook for the Second Half of 2026," specialized NPL companies accounted for 90.3% of total NPL investment in the second quarter this year. These firms are securing funds for investment in the second half through capital increases and bond issuance.

However, with the supply of bad debt on the NPL market also increasing, it is becoming harder for banks to realize full price on asset sales. According to the court auction system, the successful bid rate (winning bid as a percentage of appraised value) for real estate (apartments, factories, land, neighborhood shops), which typically ranged from 80–100%, fell to an average of 61.3% between January and June of this year. Even in Seoul, the successful bid rate was only 77.1%, while many metropolitan cities and provinces fell below 60%.

NPL firms make purchase offers to banks based on expected collateral recovery amounts. With falling successful bid rates, these offers decrease, making it difficult for banks to sell bad debt at full value. A banking sector official said, "There is a large gap in the value of collateral between the greater Seoul area and provincial regions, as well as by asset class, so banks are reviewing sales centered on items that can fetch higher prices."

For corporate loans, banks expect the number of vulnerable borrowers to grow in the second half as rates rise, and they plan to tighten loan limits and collateral ratios for each industry. The Bank of Korea had already noted in its Financial Stability Report in June that high delinquency rates in construction, real estate, and wholesale/retail could pose risks for financial institutions. As of the end of the first quarter, the delinquency rate for wholesale/retail was 2.52%, and for real estate, 3.01%—both above the overall average of 2.09%.

Another bank official commented, "It’s true that delinquency rates in some sectors are rising due to high interest rates, raw material price increases, and weak domestic demand. For businesses in struggling sectors or individual borrowers with large loans relative to their credit, banks plan to strengthen collateral requirements and monitoring to manage rising delinquency rates."

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