Increasing Number of Households and Companies Unable to Repay Debt... Red Alert on Risk Management

[Asia Economy Reporter Kim Hyo-jin] The nearly 20 trillion won surge in Korean won loans by the five major commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?last month is interpreted as meaning that the number of companies and individuals (households) relying on debt has increased due to the liquidity crunch caused by the novel coronavirus infection (COVID-19). Companies rushed to banks to secure funds to resolve imminent operational and working capital issues or to accumulate emergency funds, while individuals sought loans for living expenses and investments in stocks.

There are also observations that this is a precursor to a vicious cycle where the shock that hit industries such as aviation, shipbuilding, and oil refining is spreading to individuals. Attention is focused on whether they can manage the snowballing debt. Abnormal signals detected across various sectors are amplifying concerns.

According to the Korea Financial Investment Association and financial authorities on the 2nd, the amount of corporate bonds maturing this month is 6.5495 trillion won. Expanding the scope to include the end of this year, the total reaches 38.372 trillion won. If companies fail to extend maturities through refinancing, they must raise cash to return investments to bondholders. This is interpreted as the reason why large corporations secured over 8 trillion won in bank loans last month.

Small and medium-sized enterprises (SMEs) and self-employed individuals are receiving massive bank loans as they face financial difficulties due to COVID-19. Among the total loan increase, the proportion of loans to SMEs and sole proprietors (self-employed), who are particularly vulnerable to financial distress, surged sharply. The outstanding SME loans (including sole proprietors) at the five major commercial banks at the end of last month stood at 455.4912 trillion won, up 5.3619 trillion won (1.19%) compared to February (450.1293 trillion won). The growth rate nearly doubles the increase from January to February (2.8818 trillion won, 0.64%).

Red flags are inevitably raised in risk management within the financial sector. For example, at one major commercial bank, the SME loan delinquency rate, which had steadily decreased in the second half of last year and was managed at the 0.3% level at year-end, rose to the 0.4% level as of the end of February. At another major commercial bank with a similar loan scale, the SME loan delinquency rate has continuously increased since December last year, also entering the 0.4% range at the end of last month.

A representative from a commercial bank lamented, "The soundness that was firmly established after the 2008 global financial crisis is likely to decline due to the impact of COVID-19," adding, "This is a crisis where counterparties such as companies might completely disappear, so we cannot simply focus on risk management."

Concerns about insolvency are also rising in the non-bank sector, such as mutual finance institutions, which have a high dependency among ordinary citizens?the lifeblood of the economy. According to the Bank of Korea, the SME loan delinquency rate at Saemaeul Geumgo last year was 2.15%, up 0.21 percentage points from the previous year (1.94%). In the case of credit unions, the delinquency rate has steadily increased since 2017 (1.78%), reaching 2.75% at the end of last year. The use of credit card loans, such as card loans and cash services, which already have high default risks, hit a record high of 105 trillion won last year, the highest since 2011.

A financial sector official said, "Various financial supports conducted by the government, centered on financial authorities, ultimately involve lending money," adding, "It is difficult to predict when and with what intensity the abnormal signs found everywhere will explode."

The number of households and corporations going bankrupt due to inability to manage debt is increasing. According to the legal community, personal bankruptcy filings at 14 courts nationwide reached 3,715 in February, when the impact of COVID-19 became full-fledged, an increase of 463 cases (14.2%) compared to January (3,252 cases). Corporate bankruptcy filings also rose from 71 to 80 cases during the same period, an increase of 9 cases (12.6%).

A financial sector official pointed out, "Filing for bankruptcy is a choice made when pushed to the worst situation," adding, "The phenomenon of bankruptcy filings is just the tip of the iceberg, and the underlying real and financial disorder is likely more severe."

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