Domestic Banks Concerned About Risks from Hangegi Companies: "Stop Loans to Extend Lifespan"

[Asia Economy Reporter Kangwook Cho] Due to the increase in zombie companies caused by the impact of the novel coronavirus infection (COVID-19), there is a possibility of additional loan loss expense increases for commercial banks next year. The currently favorable indicators are pointed out to be an optical illusion effect caused by the financial stability program ending in the first half of next year.

According to the financial sector on the 7th, Shinhan Financial Investment revealed this through the report "Risk Taking Beneath the Surface," estimating that the principal of loans for the most vulnerable borrowers under interest repayment deferral is around 300 billion to 400 billion KRW for each major bank.

Currently, the operating rate of small and medium-sized enterprises is at the 60% level, the lowest since the financial crisis, and the operating rate of some industrial complexes is known to be below 50%. Nevertheless, the current indicators of soundness are stable, which is explained as possibly being an optical illusion effect due to the rapid increase in total loan volume (denominator effect) from financial support and the financial stability program.

Not only in the representative COVID-19 vulnerable industries such as travel, movies, and aviation but also in other sectors, the deterioration of debt repayment ability is prominently appearing. The report emphasized that for companies that were difficult to sustain even before the exceptional shock of COVID-19, there should be no bank loan support for life extension.

In this regard, banks are also expected to need proactive responses. In this case, despite proactive provisions in 2020, it is pointed out that additional loan loss expenses may increase in 2021.

Researcher Suhyun Kim of Shinhan Financial Investment said, "Due to regulations on high-risk private equity fund sales and customers' tendency to avoid bank funds caused by a series of financial accidents, a decrease in banks' asset management fee income is inevitable," adding, "In particular, with big tech companies entering the financial industry, the field of financial product sales is expected to be threatened, raising concerns that the concentration of interest income may deepen again."

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