Companies and Households Borrowed 100 Trillion Won Over 5 Months to 'Stay Afloat'... Rising 'Second Card Crisis' (Comprehensive)

COVID-19 Spread 2.6 Times from February to June
Companies' Debt Party, Households Also Survive on Loans

[Asia Economy Reporter Kangwook Cho] 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 businesses 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 credit crisis similar to the 2003 'card crisis' could occur.

According to the Bank of Korea and the Financial Services Commission on the 20th, from February to June?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 approximately 36.9 trillion won from banks after the COVID-19 outbreak, nearly double the 20.24 trillion won from the previous year. However, the increase in household loans is understood to be influenced by a mix of factors, including the sharp rise in the real estate market 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 at domestic banks rose for three consecutive months from March to May. In May, both large and small-to-medium enterprises saw an increase in corporate loan delinquencies, and household loan delinquencies, especially unsecured loans, also rose.

Evergreen Loans↑, Distortion of Risk Signals for Credit Deterioration

The problem is that as 'evergreen loans'?loans extended to survive by rolling over debt?increase, the risk signals warning of credit deterioration 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 effectively non-performing loans.

In particular, financial authorities, considering the economic crisis caused by COVID-19, have instructed financial companies since March to implement a six-month maturity extension and interest payment deferral for existing corporate and household loans. According to the Financial Services Commission, as of the 10th of this month, the total number of loans across the financial sector that received maturity extensions or repayment deferrals due to borrowers' inability to repay reached 407,000 cases. In terms of loan amounts, this totaled 82.6 trillion won. Within 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) in banks, credit card companies, installment leasing, and savings banks remained seemingly similar to the end of the previous year at 0.8%, 1.2%, 2.1%, and 4.7%, respectively. Compared to the end of 2016, banks' NPL ratio actually fell by 0.6 percentage points from 1.4%, while installment leasing and savings banks decreased by 0.1 and 2.5 percentage points, respectively. Only credit card companies saw a slight increase of 0.1 percentage points.

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

Lee Hyuk-jun, head of the Financial Evaluation Division at NICE Credit Rating, said, "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 judgments that reflect the true condition of financial companies." He expressed concern, saying, "Especially, maturity extensions and interest payment deferrals for marginal borrowers resemble the refinancing loans seen during the 2003 card crisis."

Refinancing loans are measures that extend the maturity and re-lend on delinquent 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 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 increased sharply during this period, and when these refinancing loans were added to delinquent loans, the delinquency rate before refinancing loans rose from 11.6% at the end of 2002 to 32.1% at the end of September 2003. Ultimately, the liquidity crisis of LG Card in November 2003 triggered the bursting of the accumulated bubble, resulting in massive losses totaling 9 trillion won for full-fledged 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 card crisis.

[Image source=Yonhap News]

After the LG Card crisis in November 2003, financial authorities introduced the 'real delinquency rate,' which reflects refinancing loans, requiring credit card companies to report it in their business reports. The real delinquency rate is calculated by adding refinancing loans to delinquent loans but deducting amounts where at least 30% of the principal has been repaid and where normal principal and interest payments have been made for at least one-third of the loan period or six months (amounts with improved repayment ability).

The card crisis is a representative failure case of household loans that caused massive losses totaling 9 trillion won among full-fledged credit card companies during 2003-2004. There is criticism that if financial authorities had recognized sooner that refinancing loans distorted credit card companies' asset soundness indicators and reflected this in official delinquency rates, the card crisis might have unfolded differently.

Lee said, "When financial institutions' financial indicators no longer reflect reality, confusion arises in the financial market," and added, "Financial authorities need to prepare measures to address information distortion when considering whether to extend maturity extensions and interest payment deferrals."

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