Loan: Burden or Relief... Financial Sector in Dilemma

Loan Demand Expected to Surge Amid COVID Resurgence
Red Flags for Asset Quality Indicators at 5 Major Banks
July Delinquency Rates Show Increase from June
Household and Corporate Loans Continue Rapid Growth

[Asia Economy Reporter Kim Hyo-jin] Banks and financial authorities appear to be caught in a 'loan dilemma.' With expectations that market loan demand will continue to rise steadily due to the resurgence of COVID-19, red flags have started to appear regarding the soundness of major commercial banks. Under normal circumstances, financial authorities would have tightened loan regulations, but due to considerations related to the COVID-19 situation, they are maintaining a 'cautious mode.'

On the morning of the 24th, Sohn Byung-doo, Vice Chairman of the Financial Services Commission, at a meeting of the Financial Risk Response Team of the Economic Central Disaster and Safety Countermeasures Headquarters held at the Korea Federation of Banks in Jung-gu, Seoul, did not directly mention the recent surge in unsecured loans and the consequent rise in delinquency rates, only stating a general position that "we will respond meticulously and steadily to financial sector risks."

A financial authority official said, "Financial policy, especially loan management, inevitably prioritizes the COVID-19 spread situation," adding, "It is not easy to immediately introduce groundbreaking loan regulation measures." Considering the series of messages from financial authorities, the general analysis is that visible measures regarding the loan situation in the banking sector are unlikely to be announced in the near future.

On the other hand, concerns within the banking sector are increasing. In fact, risk signals are being detected in the soundness of major banks. As of the end of July, the overall loan delinquency rates (provisional) of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?were recorded at 0.23% to 0.36%. Compared to the end of June (0.21% to 0.33%), both the lower and upper bounds increased by 0.02 and 0.03 percentage points, respectively.

For corporate loans, the July delinquency rate (0.2% to 0.48%) generally exceeded the June level (0.18% to 0.38%). In some banks, the delinquency rate approached 0.5%. The household loan delinquency rate also saw a sharp rise in the lower bound from 0.13%?0.29% to 0.22%?0.28% within a month.

According to the Financial Market Trends announced by the Bank of Korea for July, the outstanding household loans of banks as of the end of July amounted to 936.5 trillion won, an increase of 7.6 trillion won from June. This is the fourth-largest monthly increase this year and the largest for July since statistics began in 2004. During the same period, the outstanding corporate loans reached 955.1 trillion won, also the largest increase ever recorded for July.

Banks Inspect Loan Systems While Managing Soundness
Concerns Rise Over 'Potential Risks' Such as Maturity Extensions

Banks have set soundness management through strengthening loan screening as a key task for the second half of the year and are inspecting loan systems across various departments. An executive in charge of corporate loans at a major commercial bank A said, "We have started comprehensive management, including a full review of habitual rollovers of major client companies and filtering out marginal companies," adding, "The atmosphere where banks proactively compete to attract corporate loans has long disappeared."

A representative from commercial bank B explained, "Following the financial authorities' policy, we plan to focus on measures to block borrowers from using loan funds for real estate or other purposes different from those originally notified," and added, "Overall, we are devising measures to strengthen loan screening."

Some express concerns that the increase in delinquency rates in July may be just the 'tip of the iceberg.' This is due to significant worries about hidden defaults related to COVID-19. According to financial authorities' policies, commercial banks have extended the maturity of a total of 185,000 loans amounting to 53 trillion won from February to the 18th of this month.

Financial authorities are expected to soon finalize and announce additional extension plans for COVID-19-related loan maturities across all financial sectors. A commercial bank official said, "Although concerns about soundness indicators are high, it is also true that it is difficult to excessively tighten loans in key sectors such as unsecured loans," adding, "Expanding overall credit assets through healthy loans is also important." The official predicted, "For the time being, a mood of cautious observation and balancing between banks and financial authorities is likely to continue."

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