Banks and Authorities Both Say "What to Do About Loans"... Financial Sector Caught in a Dilemma (Comprehensive)

Loan Demand Expected to Surge Amid COVID Resurgence
Red Flags for Credit Health Indicators at 5 Major Banks
July Delinquency Rates Show Upward Trend Compared to 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 loan demand in the market will continue to rise for the time being 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 lending, 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, did not directly mention the recent surge in unsecured loans and the resulting rise in delinquency rates during the Financial Risk Response Team meeting of the Economic Central Disaster and Safety Countermeasures Headquarters held at the Korea Federation of Banks in Jung-gu, Seoul. Instead, he only stated a general position, saying, "We will respond meticulously and steadily to financial sector risks."

Financial Services Commission Chairman Eun Sung-soo also expressed his thoughts after a recent meeting with heads of financial associations, saying, "It is unclear whether the nature of unsecured loans is due to worsening economic conditions, stock investment, or real estate investment," and added, "In the COVID-19 situation, we are in a position to ask financial association heads to inject funds, so there is a conflicting aspect if we suppress unsecured loans."

A financial authority official lamented, "Financial policy, especially loan management, inevitably prioritizes the COVID-19 spread situation," and said, "It is not easy to come up with a groundbreaking loan regulation plan immediately." Considering a series of messages from the financial authorities, the general analysis is that the likelihood of visible measures regarding the banking sector's loan situation emerging in the near future is low.

Concerns within the banking sector are rising. Warning signs are being detected regarding 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 around 0.23% to 0.36%. Compared to the end of June (0.21% to 0.33%), the lower and upper bounds increased by 0.02 and 0.03 percentage points, respectively.

For corporate loans, the delinquency rate in July (0.2% to 0.48%) generally exceeded that of June (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 at 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 and Manage 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 the habitual rollover 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 major 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.' There is significant worry about hidden insolvencies related to COVID-19. According to financial authorities' policies, commercial banks have extended the maturity of a total of 185,000 loans worth 53 trillion won from February to the 18th of this month.

The financial authorities are expected to soon finalize and announce additional extension plans for COVID-19-related loan maturities across all financial sectors. A representative from a commercial bank said, "Although concerns about soundness indicators are high, it is also true that it is difficult to simply tighten loans in key sectors such as unsecured loans," adding, "It is important to expand overall credit assets through healthy lending." The representative 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.