[Financial Sector Warning] Shinhan Bank Increases Small Business Loans... Delinquency Rate Soars

Non-audited Corporations' Delinquency Rate Soars to 0.8% by End of March... Four Times Higher than Audited SMEs and SOHOs
Signs of Insolvency Quickly Surface Amid COVID-19 and Economic Slowdown
Banking Sector Tightens Corporate Loan Risk Management Focused on Non-audited Corporations

[Asia Economy Reporter Kwon Haeyoung] As the novel coronavirus disease (COVID-19) rapidly cools the worsening economy, red flags have been raised in risk management within the banking sector, particularly concerning loans to non-external audit small and medium-sized enterprises (SMEs). In particular, Shinhan Bank, which has rapidly increased loans to non-external audit corporations over the past five years, is seeing its delinquency rate soar close to 1% recently, indicating signs of bad loans surfacing faster than expected.

According to the financial sector on the 8th, Shinhan Bank's delinquency rate for non-external audit SME loans stood at 0.8% at the end of March this year. This is four times higher than the delinquency rates for externally audited SME and individual business loans (both at 0.22%).

Non-external audit corporations are companies with assets under 12 billion KRW that do not undergo external accounting audits. As competition among banks to expand loans to high-quality SMEs intensifies, some banks have turned their attention to the gray zone of non-external audit SMEs. Although loan default risk is higher, business operations are easier, so they avoid 'cutting their own flesh' style competition.

Shinhan Bank's delinquency rate for non-external audit SME loans steadily rose from 0.54% at the end of March 2019 to 0.69% at the end of June and 0.74% at the end of September. It dropped to 0.59% in December, reflecting the effect of selling and disposing of delinquent loans, but rose again close to 1% in March this year. This trend is the exact opposite of individual business and externally audited SME loan delinquency rates, which both decreased by 0.01 and 0.04 percentage points respectively compared to a year ago, standing at 0.22% at the end of March this year.

Regarding this, Shinhan Bank explained, "Due to the characteristics of non-external audit corporations, the loan delinquency rate is somewhat higher than other customer groups, showing a mid-to-high 0.7% range. Although the first quarter delinquency rate slightly increased compared to the previous year due to a decrease in the amount of sold and disposed delinquent loans, the delinquency rate itself has not worsened."

The problem is that as the economic downturn accelerates due to COVID-19, loan defaults among non-external audit SMEs may accelerate. Non-external audit SMEs are smaller and more sensitive to economic fluctuations compared to externally audited corporations. Their financial transparency is also relatively low, increasing default risk. In the past, during the tenure of KB Kookmin Bank President Kang Jungwon from 2004 to 2010, rapid expansion of loans to non-external audit SMEs led to significant deterioration in loan soundness.

In particular, Shinhan Bank has driven the expansion of loans to non-external audit SMEs over the past five years. As of the end of March, loans to non-external audit SMEs amounted to 29.745 trillion KRW, accounting for 31.9% of total SME loans. In the first quarter of this year, total SME loans (including individual business loans) increased by 2.3% year-on-year, while loans to non-external audit SMEs grew by 3.1%.

An executive from a commercial bank said, "Some banks were aggressively pursuing loans to non-external audit corporations even until early February, just before COVID-19 spread, accepting low interest margins. If loans are recklessly increased amid an economic downturn, no matter how much soundness management is strengthened, defaults are inevitable."

The rise in delinquency rates at Shinhan Bank, known as the 'management expert Shinhan,' has other banks on alert. Woori Bank's SME delinquency rate also rose from 0.36% at the end of March 2019 to 0.4% at the end of January this year.

The concern is that defaults are expected to become more pronounced from the second half of the year. Small and micro SMEs sensitive to economic trends may temporarily manage by securing funds, but as the COVID-19 crisis prolongs and the economic downturn continues, their ability to repay loans will gradually weaken.

Another commercial bank official said, "Defaults are expected to become visible from the third to fourth quarters, so we are preparing for default risks by conducting a full survey of 20% of corporate loans and performing thematic audits. It is a difficult situation where we must catch two rabbits at once: expanding funding to support the real economy and managing loan soundness."

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