[Financial Stability Status] 10% Default Risk on Corporate Loans... 192,000 Vulnerable Self-Employed Households

Since July Last Year, Interest Rate Hikes Result in Additional Loan Burden of 1 Trillion Won for Businesses and Households

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] Warning signs of excessive loan growth compared to the real economy are being detected in various places. Loans to companies with a high risk of default have exceeded 10% of total corporate loans, and the number of self-employed households classified as ‘high-risk households’ due to weak debt repayment ability has reached 192,000. Concerns are emerging that loan defaults could materialize if loan interest rates gradually rise as the economy recovers.

According to the ‘Financial Stability Status (March 2021)’ report released by the Bank of Korea on the 25th, additional interest burdens have already appeared. Since July last year, as market interest rates rose, the additional interest paid by companies and households on loans was about 1 trillion won. This estimate was made by applying the market interest rate increase of 8.1 basis points (1bp = 0.01 percentage points) to the outstanding balance of variable-rate loans. So far, the interest burden has not been significant, but if loan interest rates rise in the future, the burden on economic agents could increase further.

Loans to ‘Risky Companies’ with High Default Probability Exceed 10%

‘Repayment-risk companies (risky companies)’ that fail to meet all criteria for interest coverage ratio, debt repayment ratio, and debt ratio accounted for 6.9% as of the end of last year. Loans to risky companies (risky loans) accounted for 10.4% of total loans, continuing an upward trend. Companies under ‘repayment-risk caution (caution companies)’, which are not at the level of default but require attention, also accounted for nearly 40%.

By industry, the proportion of risky companies was high in aviation (71.4%), shipping (25.0%), and accommodation & food services (22.2%) due to travel contraction and sluggish face-to-face services. In the aviation industry, this means that 7 out of 10 companies have a high risk of default. The proportion of risky loans was high in sectors with large loan sizes per company, such as machinery equipment and shipbuilding. If interest burdens are added to companies with slow recovery speeds, financial indicators may deteriorate, increasing the likelihood of being classified as risky companies. For example, in a basic scenario where corporate sales growth rate records 7.2% this year and overall corporate performance recovers to pre-COVID-19 levels, the proportion of risky loans decreases from 10.4% to 10.1%. However, in a worst-case scenario where the COVID-19 crisis prolongs, performance remains poor, and interest rates rise, the proportion of risky loans could increase to 16.7%.

A Bank of Korea official said, "If average interest costs rise to pre-COVID-19 levels, even companies currently in good financial health could be classified as risky companies," and added, "Care must be taken to prevent credit risks in vulnerable sectors from emerging all at once when financial support measures are withdrawn."

The ability of companies to pay interest is also a point of focus. Last year, the average interest coverage ratio of companies was 4.4 times, slightly improving as loan interest rates fell. However, excluding the electronics industry, the interest coverage ratio dropped sharply to 3.1 times. The proportion of companies with an interest coverage ratio below 1, meaning they cannot cover interest with operating profit, increased from 36.1% in 2019 to 40.7% last year.

192,000 Self-Employed ‘High-Risk Households’ with Weak Debt Repayment Ability

The number of self-employed ‘high-risk households’ with weak debt repayment ability was counted at 192,000 as of the end of last year. This is a sharp increase from 109,000 households in March last year, within nine months. ‘High-risk households’ refer to those with a debt service ratio (DSR) of 40% or more, indicating a heavy burden of principal and interest repayment, and a debt-to-asset ratio (DTA) of 100% or more, meaning it is difficult to repay debt through asset sales. The debt scale held by these households doubled to 76.6 trillion won during the same period. This accounts for 6.5% of all self-employed households with debt by number of households and 15.2% by amount. By industry, retail and wholesale households had the highest loan proportion at 18.8% based on financial debt, followed by transportation (15.4%), healthcare (5.4%), and personal services (5.3%).

A Bank of Korea official stated, "The debt repayment ability of self-employed persons has significantly weakened due to sales shocks caused by the COVID-19 crisis," and added, "In particular, the deterioration of financial health among low-income (1st to 2nd income quintile) self-employed persons was more severe than in other income groups." The official also noted, "It is necessary to consider supplementary measures such as installment repayment when ending principal and interest repayment deferral measures."

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