Personal Business Loans as Bad Detonators... Will the Bomb Explode? 'Money Worries' (Comprehensive)

Nearly 10 Trillion Increase Compared to Last Year
Over 1 Trillion in Loans with Uncollectible Interest

[Asia Economy Reporter Jo Gang-wook] Bank loans to individual business owners have increased by nearly 10 trillion won compared to last year, being identified as a potential financial risk in the banking sector. While financial authorities are focusing on tightening regulations on mortgage loans, jeonse (key money deposit) loans, and unsecured loans, the amount of individual business owner loans at the five major commercial banks that are not even earning interest has already exceeded 1 trillion won. Although the delinquency rate related to these loans has plateaued amid the prolonged COVID-19 pandemic, this is pointed out as a 'visual illusion effect' caused by loan maturity extensions and interest payment deferrals.

340 trillion won by end of August this year... A sharp increase of 10 trillion won compared to last year's annual 247 trillion won

According to the Bank of Korea and financial authorities as of the end of August this year, the outstanding balance of individual business owner loans in the banking sector reached 372.5 trillion won, with an increase of 34 trillion won from the beginning of the year to the end of August. The increase over eight months already surpasses last year's annual increase of 24.7 trillion won by nearly 10 trillion won. This is largely due to the government's active encouragement of loans by commercial banks to support individual business owners affected by COVID-19.

Earlier, the government allocated a total of 16.4 trillion won in the first financial support program for small business owners in February, at the early stage of the COVID-19 outbreak, and from May implemented a second program providing a total of 10 trillion won in emergency loans. The funds prepared for the first program ran out in less than two months due to high demand, and with the government's recent decision to expand financial support through the fourth supplementary budget, the upward trend in individual business owner loans is expected to continue.

Meanwhile, the amount of principal and interest deferred on individual business owner loans at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?is currently about 36 trillion won, with the amount not even earning interest exceeding 1 trillion won. This is due to the government's loan maturity extension and interest payment deferral measures extended until the end of March next year.

Concerns over a default bomb when deferral measures end in March next year

The problem arises after these policy protections disappear in March next year. According to the Financial Supervisory Service, the delinquency rate on bank loans as of the second quarter this year was 0.33%, down from 0.36% at the end of last year. It also decreased by 0.09 percentage points compared to the same period last year, marking a record low. The ratio of non-performing loans (NPL ratio) also fell from 0.77% to 0.71% during the same period. The NPL ratio refers to the proportion of loans overdue for more than three months and considered unlikely to be recovered out of total loans. Currently, banks classify interest not being collected due to government policies as 'normal repayment,' which is analyzed as a 'visual illusion effect.'

Experts agree that since the delinquency rate is a lagging indicator of the economy, the current trend should not be used to prematurely judge the situation. As the government has deferred principal and interest repayments for individuals, small and medium enterprises, and small business owners who suffered income losses due to COVID-19, proactive measures should be taken to prepare for signs of defaults that may emerge after March next year. In particular, if unemployment and business closures among self-employed individuals become visible domestically, similar to the sharp contraction of the real economy caused by a surge in unemployment in the U.S. due to COVID-19, credit quality could deteriorate. Given the vulnerability of individual business owners to economic downturns, large-scale delinquencies could occur when loan maturities come due amid delayed economic recovery.

Financial authorities considered strengthening management last year... scrapped due to COVID-19

At the end of last year, financial authorities indicated plans to strengthen management of individual business owner loans, identifying them as a potential source of bad loans. This included measures such as having banks voluntarily raise lending standards by considering the total debt service ratio (DSR), including existing household loans, rather than just credit scores when individual business owners apply for loans. This was because key profitability indicators for banks, such as net interest margin (NIM) and return on equity (ROE), continued to decline, raising red flags about bank soundness. At the time, the Financial Supervisory Service saw the timing as near for tightening individual business owner loans to manage bank soundness, but all regulatory measures were scrapped due to the COVID-19 situation.

The Basel Committee on Banking Supervision (BIS) capital adequacy ratio, which indicates banks' asset soundness, is also on a downward trend. As of the second quarter, the total capital ratio of domestic banks under BIS standards was 14.53%, down 0.19 percentage points from the end of the previous quarter. This is because credit risk-weighted assets increased due to corporate loan growth, and market risk-weighted assets also rose, resulting in the growth rate of risk-weighted assets (4.1%) exceeding that of total capital (2.8%).

Tightening unsecured loans while increasing individual business owner loans... concerns over bank soundness

Recently, due to the rapid increase in unsecured loans, banks are in a situation where they need to reduce loan amounts to high-credit, high-income borrowers. However, increasing loans to small business owners with higher default risks could negatively impact financial institutions' soundness. According to the Financial Services Commission, as of the 18th of last month, the amount supported to economically sensitive sectors such as wholesale and retail, accommodation and food services, transportation and warehousing, and travel and leisure accounted for 34% (69.7 trillion won) of the total, a high level.

A financial industry official said, "In fact, mortgage loans, jeonse loans, and unsecured loans to high-income, high-credit borrowers provided by banks are very stable loans," adding, "Individual business owner loans with deferred interest payments must be prepared for defaults, so the additional loan loss provisions burden on banks could swell by more than 1 trillion won in the future," expressing concern.

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