[Financial Sector Warning] Savings Banks Face Risk Burden from 'Food and Accommodation Industry Loans'

Corporate Loans of 39.6961 Trillion Won at End of February
Accounting for 60% of Total Credit
COVID-19 Impact on Economically Sensitive Sectors
Conservative Loan Asset Management in Q2

[Asia Economy Reporter Kim Min-young] The savings bank industry has entered a conservative loan asset management phase starting in the second quarter, including total credit volume control, in preparation for the impact of the novel coronavirus infection (COVID-19). This is because loans to economically sensitive sectors such as food and lodging, and wholesale and retail, which were directly hit by the COVID-19 fallout, have increased significantly. Although delinquency rates have not surged yet, concerns are being raised that loan defaults in these sectors may materialize from the second quarter when government financial support ends.

According to the Bank of Korea and financial authorities on the 8th, as of the end of February this year, total loans by savings banks amounted to 66.3717 trillion won, an 11.2% (6.6871 trillion won) increase compared to 59.6846 trillion won in February last year. Among these, corporate loans recorded 39.6961 trillion won, up 11.4% year-on-year, accounting for about 60% of total loans. The problem is that most of the corporate loans handled by savings banks are concentrated in economically sensitive sectors such as wholesale and retail, and food and lodging. An industry insider said, “Among small and medium enterprises, very small companies with only a few employees are the main customer base of savings banks.”

As small business owners who could not pass the loan thresholds of commercial banks flocked to savings banks, the industry began to operate loans conservatively to manage risks. This is because worsening economic conditions could increase concerns about loan defaults among individual business owners. Savings bank loan officers are on high alert to detect signs of defaults among small business owners and low- to medium-credit borrowers who could be directly hit by COVID-19.

A savings bank official said, “Until the first quarter, the prevailing stance was to ‘maintain the status quo’ compared to the same period last year, but from the second quarter, we have shifted to conservative operations,” adding, “In recent management meetings, there were several opinions that the scale of loans to vulnerable borrowers should be reduced.”

There are three main ways the industry manages loan assets. First, lowering the credit rating eligible for loans. For household loans, for example, the average eligible credit rating was maintained at ‘7.5’, but it has been lowered to 7.2. Also, income verification has become stricter, and loans are denied if income is inconsistent. It is reported that the loan approval rate at savings banks is below 10%.

For corporate loans, sales, operating profit, and business feasibility are carefully examined during loan screening. Before loan execution, on-site inspections are conducted to prudently assess the possibility of default.

They have also engaged in total volume management by reducing loan amounts compared to the previous month. Savings Bank A saw double-digit growth in total loans in the first quarter compared to the same period last year but began reducing loans from April.

Another industry insider said, “In the first quarter, specialized financial companies temporarily reduced loans to prepare for liquidity crises, causing customers to flock to savings banks,” adding, “Since last month, loan volumes have been reduced to strengthen risk management.”

There are also expectations that delinquency rates may rise significantly once COVID-19 financial support programs such as interest reductions, interest payment deferrals, and maturity extensions end. A Savings Bank B official explained, “We expect delinquency rates to increase from the third quarter when principal and interest repayments are concentrated after financial support ends,” adding, “Each savings bank is closely monitoring their loan customers.”

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