Non-Performing Loan Ratio Dropped to 0.5%... Yet Reasons for Continued Concern

Provisional Figures on Non-Performing Loans of Domestic Banks Released Last Year
Domestic Banks' NPL Ratio Falls by 0.14 Percentage Points to 0.50%
Provision Coverage Ratio Rises by 61.8 Percentage Points
FSS: "Not a Situation to Be Complacent, Need to Strengthen Loss Absorption Capacity"

[Asia Economy Reporter Song Seung-seop] Due to the impact of financial authorities' measures such as loan maturity extensions and interest repayment deferrals, the non-performing loan (NPL) ratio of domestic banks fell last year. Although the reserve ratio against non-performing loans increased, warnings have been raised that the situation is still not reassuring.

According to the Financial Supervisory Service on the 22nd, the provisional NPL ratio of domestic banks last year was 0.50%, down 0.14 percentage points from 0.64% at the end of the previous year. The NPL ratio refers to the proportion of non-performing loans within total credit.

The NPL ratio showed a downward trend across all sectors. In particular, the NPL ratio for large corporations dropped from 1.23% to 0.99% during the same period, marking the largest decline of 0.25 percentage points. For mortgage loans, the ratio was the lowest at 0.11%, down from 0.16%. The ratios for small and medium enterprises, individual business owners, and household sectors were also favorable at 0.57%, 0.20%, and 0.16%, respectively.

This is because while credit significantly increased last year, new non-performing loans sharply decreased. Newly generated NPLs totaled 10.8 trillion won, a decrease of 1.7 trillion won compared to 12.5 trillion won the previous year. The scale of new corporate credit NPLs decreased by 10.5 percentage points to 8.3 trillion won, and new household credit NPLs dropped significantly by 25.3% to 2.1 trillion won.

The reserve ratio against NPLs rose by 61.8 percentage points from 257.9% to 319.7%. Banks accumulate loan loss reserves, which belong to capital, and loan loss provisions, which are included in expenses, to prepare for potential losses. The reserve ratio against NPLs is the ratio of these accumulated reserves and provisions compared to the NPLs. When including ‘watchlist’ loans, which are not classified as NPLs but are risky, the reserve ratio increased by 14.7 percentage points from 97.7% to 112.4%.

However, there are also concerns that the situation is still not safe. The rise in the reserve ratio against NPLs may have been influenced by a ‘delinquency rate illusion effect.’ The financial authorities have implemented policies such as loan maturity extensions and interest repayment deferrals for small business owners as part of COVID-19 financial support measures. These loans are classified as ‘normal,’ creating an effect that makes it appear as if NPLs have decreased. This means the reserve ratio can increase without banks needing to accumulate additional funds.

In fact, loan loss reserves increased from 16.6 trillion won to 18.1 trillion won, but loan loss costs, which include loan write-offs and provision transfers, decreased by 42.7% from the previous year to 4.1 trillion won. Even when looking solely at net provision transfers, the amount decreased.

The Financial Supervisory Service also holds the view that despite improved asset soundness indicators of banks, the situation is not yet reassuring. Recently, uncertainties in both domestic and international economies have increased due to factors such as the Ukraine crisis and the normalization of global monetary policies.

A Financial Supervisory Service official stated, “It is necessary to proactively prepare for the possibility of an increase in non-performing loans as various financial support measures such as maturity extensions and repayment deferrals are normalized in the future. We will continue to encourage banks to expand their loss absorption capacity so that they can maintain soundness and faithfully perform their core functions despite domestic and international economic shocks.”

He added, “We plan to guide banks to thoroughly assess latent credit risks in this unprecedented pandemic situation and to accumulate sufficient loan loss provisions based on that assessment.”

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