Corporate and Household 'Debt' Tsunami... Borrowed 106 Trillion Won in 5 Months

Corona Spread 2.6 Times Increase from Feb to June
Life-Extension Loans Up, Distorted Signs of Default Risk
Concerns Over Possible Recurrence of 2003 Card Crisis

[Asia Economy Reporter Jo Gang-wook] Since the outbreak of the novel coronavirus disease (COVID-19), the amount of new loans borrowed by corporations and households from banks has exceeded 100 trillion won. Economic agents, including companies and self-employed individuals, are surviving the 'COVID-19 hardship period' through debt. Some experts warn that as financial authorities appear to be leaning toward extending the maturity of existing corporate and household loans, a default crisis similar to the 2003 'credit card crisis' could occur.

According to the Bank of Korea and the Financial Services Commission on the 20th, from February to June, the five months since the COVID-19 situation began in earnest, corporations and households took out more than 106 trillion won in new loans from banks. Corporate loans, which stood at 877.5 trillion won at the end of January, increased to 946.7 trillion won by the end of June. During the same period, household loans surged from 892 trillion won to 928.9 trillion won.

Compared to the same period last year, when the increase in corporate loans was 20.12 trillion won and household loans 20.24 trillion won, totaling 40.36 trillion won, this is 2.6 times larger. This indicates that the financial situation of corporations and households was that urgent.

In particular, the increase in corporate loans was significant. As of the end of June, corporate loans surged by 69.2 trillion won compared to the end of January. This is more than 3.4 times the 20.12 trillion won increase during the same period last year. Households borrowed about 36.9 trillion won from banks after the COVID-19 outbreak, nearly double the 20.24 trillion won in the same period last year. However, the increase in household loans is understood to be influenced by a mix of factors, including the real estate market surge at the end of last year, successive government loan regulations, urgent loans due to COVID-19, and demand for stock investments.

As the loan increase widened, the delinquency rate on won-denominated loans by domestic banks rose for three consecutive months from March to May. In May, corporate loans increased for both large and small-to-medium enterprises, and household loans, especially unsecured loans, showed a notable rise.

The problem is that as 'evergreen loans'?loans extended to survive through debt?grow, the warning signals indicating the transmission of defaults can become distorted. Evergreen loans, where financial institutions continuously extend loan maturities despite borrowers' inability to repay, appear as normal loans on the surface but are actually non-performing loans.

In particular, financial authorities, considering the economic crisis caused by COVID-19, have implemented measures since March to extend maturities and defer interest payments on existing corporate and household loans for six months. According to the Financial Services Commission, as of the 10th of this month, a total of 407,000 cases of loan maturity extensions or repayment deferrals have been granted across the financial sector for loans that economic agents could not repay. The total amount involved reached 82.6 trillion won. In the banking sector alone, there were 147,000 cases amounting to 43.3 trillion won. As a result, at the end of March this year, the ratio of non-performing loans (NPL ratio) for banks, credit card companies, installment leasing, and savings banks was 0.8%, 1.2%, 2.1%, and 4.7%, respectively, maintaining levels similar to the end of the previous year. Compared to the end of 2016, banks' NPL ratio actually fell by 0.6 percentage points from 1.4%, and installment leasing and savings banks decreased by 0.1 and 2.5 percentage points, respectively. Only credit cards saw a slight increase of 0.1 percentage points.

Currently, financial authorities are leaning toward extending the maturity extension and interest payment deferral measures beyond September as the COVID-19-induced economic downturn shows signs of prolonging. Some voices warn that if these temporary measures decided during the crisis are prolonged, information distortion could occur.

Lee Hyuk-jun, Head of Financial Evaluation at NICE Credit Rating, expressed concern, saying, "If these measures continue, financial institutions' asset soundness indicators will become meaningless, making it difficult for financial authorities and credit rating agencies to make accurate assessments that reflect the actual condition of financial institutions." He added, "In particular, the maturity extension and interest payment deferral for marginal borrowers resemble the refinancing loans seen during the 2003 credit card crisis."

Refinancing loans are measures that extend the maturity of delinquent loans and provide new loans. However, during 2002-2003, when delinquency rates in the credit card industry surged, refinancing loans were used as a loophole to lower publicly disclosed delinquency rates, undermining their original purpose. In fact, during the 2003 credit card crisis, the publicly disclosed delinquency rate (over one month overdue) in the credit card industry remained steady at 9-10% until September. However, refinancing loans originating from delinquent loans sharply increased during this period, and when these refinancing loans were added to delinquent loans, the delinquency rate before refinancing soared from 11.6% at the end of 2002 to 32.1% at the end of September 2003. Ultimately, in November 2003, the liquidity crisis at LG Card triggered the accumulated bubble to burst, resulting in massive losses totaling 9 trillion won for specialized credit card companies. According to a recent Bank of Korea survey, the household credit risk outlook index perceived by banks for the third quarter was 43, the highest level since the third quarter of 2003 (44), just before the credit card crisis.

Lee emphasized, "If financial institutions' financial indicators no longer reflect reality, confusion will arise in the financial market," and pointed out, "Financial authorities need to prepare measures to address information distortion when considering whether to extend maturity extension and interest payment deferral measures."

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