Increase in Soho Loan Delinquency Rates... Concerns Over COVID-19-Induced Financial Instability 'Time Bomb'

Rising Delinquency Rates This Year
Concentrated Large-Scale Financial Support
Fear of Chain Bankruptcies Among Marginal Companies
P2P Loan Delinquency Rates Also Surge

[Asia Economy Reporter Kangwook Cho] Amid the COVID-19 pandemic, which has dealt a direct blow to small and medium-sized enterprises (SMEs) and self-employed individuals, the delinquency rate on loans to the core group of individual business owners (SOHO) is rising, raising concerns about potential defaults. In particular, financial institutions have steadily increased loans to this group over the years, and recently have concentrated large-scale financial support in response to COVID-19, leading to concerns that if marginal companies go bankrupt in waves, it could trigger a chain reaction of financial failures.

According to the financial sector on the 25th, the delinquency rates on individual business owner loans at the four major commercial banks?KB Kookmin, Woori, Shinhan, and Hana?have shown a steady increase since the end of last year. KB Kookmin Bank’s SOHO loan delinquency rate, which had dropped by 0.08 percentage points to 0.17% at the end of December last year compared to the previous month, rose to 0.18% in January and 0.19% in February this year. Shinhan Bank’s rate also increased from 0.20% at the end of last year to 0.23% in January and 0.24% in February. During the same period, Hana Bank (0.20%→0.25%→0.28%) and Woori Bank (0.27%→0.28%→0.29%) also showed upward trends in their individual business owner loan delinquency rates. There are particular concerns that the delinquency rate for individual business owner loans in the banking sector will increase further this month due to the spread of COVID-19.

A representative from a commercial bank said, "Self-employed individuals, whose sales have sharply declined due to the cooling of consumer sentiment caused by the COVID-19 pandemic, inevitably suffer damage, which will also affect the soundness of SOHO loans," adding, "We are carefully monitoring the situation as concerns about defaults grow if the crisis prolongs."

Previously, banks have expanded SME loans instead of household loans in line with the government’s 'productive finance' policy and the new loan-to-deposit ratio (LDR) regulations applied from this year. The new LDR regulation increases the risk weight for household loans by 15% while lowering the risk weight for corporate loans by 15%. As of the end of last month, the outstanding SME loans at the five major domestic commercial banks, including NH Nonghyup Bank, amounted to approximately 451 trillion won, with individual business owner loans (242 trillion won) accounting for more than half. The outstanding individual business owner loans surged by about 18 trillion won in one year.

The problem is that not only commercial banks but also P2P (peer-to-peer) finance and savings banks, which have a high proportion of individual business owner loans, are showing a sharp increase in delinquency rates. In particular, P2P loans, whose outstanding balance has exceeded 2 trillion won, had a delinquency rate of 15.8% as of the 18th, jumping 4.4 percentage points from 11.4% at the end of last year. The delinquency rate on individual business owner loans at savings banks increased from 4% at the end of 2018 to 4.3% at the end of 2019. This figure is 0.6 percentage points higher than the overall loan delinquency rate (3.7%), and vulnerable groups such as small business owners are included among individual business owners.

A financial sector official said, "It is difficult to indiscriminately recover loans in a tough economic situation, but if defaults are expected, new loans will naturally be difficult," adding, "There is also a possibility of recovering part of the loans in addition to extending existing loans."

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