The Bank of Korea: "Rising Delinquency Rate Among Vulnerable Young Borrowers... Increased Concerns Over Credit Risk"

Vulnerable Borrowers' Loans 60.6% from Non-Bank Sectors... "Selective Support Needed for Vulnerable Groups"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] The Bank of Korea warned on the 24th that there is a high risk of increased credit risk centered on vulnerable borrowers such as young people and self-employed individuals during the process of normalizing the currently accommodative financial conditions. Accordingly, it pointed out that financial institutions, including non-bank entities, should be fully prepared for the possibility of deteriorating loan soundness.

According to the 'Financial Stability Status' report released by the Bank of Korea on the same day, the proportion of vulnerable borrowers was 6.0% of the total number of borrowers and 5.0% of the loan balance at the end of last year, continuing a downward trend since the third quarter of 2018 (7.7%, 6.5%). Vulnerable borrowers refer to those who are 'multiple debtors' borrowing from three or more financial institutions and who have low income (bottom 30% income) or low credit (credit score of 664 or below).

Although the overall proportion of vulnerable borrowers has decreased, recently, the credit risk of vulnerable young borrowers has increased more than that of other age groups.

Among young people in their 20s and 30s, 6.6% of all borrowers were vulnerable borrowers, which was higher than the average of other age groups (5.8%). The delinquency rate of vulnerable young borrowers also rapidly increased from 5.0% at the end of the first quarter of last year to 5.8% at the end of the fourth quarter, unlike other age groups.

In particular, with a significant increase in household loans for self-employed individuals after COVID-19, delays in sales recovery in some face-to-face service sectors have intensified, leading to an increase in vulnerable self-employed borrowers and relatively high principal and interest repayment burdens. Among vulnerable borrowers, self-employed individuals accounted for 12.1% in terms of the number of borrowers and 21.2% in terms of loan amount, both rising compared to the end of 2019, two years ago (10.6%, 19.6%).

The debt service ratio (DSR) of vulnerable self-employed borrowers was 105.5% as of the end of the third quarter of last year, significantly higher than the average of other vulnerable borrowers (59.6%). Although the delinquency rate of vulnerable self-employed borrowers was 4.4% at the end of last year, lower than that of other vulnerable borrowers (5.8%), the Bank of Korea diagnosed that there is a latent possibility that the risk of default may materialize more significantly during the normalization process, such as the end of financial support.

Furthermore, the proportion of loans to vulnerable borrowers from the non-bank sector reached 60.6%, significantly higher than that of non-vulnerable borrowers (39.8%). The delinquency rate of vulnerable borrowers in savings banks, which have relatively high interest rates, is showing signs of increasing.

The Bank of Korea explained in the report, "If domestic and external conditions worsen during the process of normalizing accommodative financial conditions, the repayment ability of vulnerable borrowers may decline, and credit risk may increase, especially among young and self-employed vulnerable borrowers who have significantly increased their loans." It added, "Financial institutions, including the non-bank sector, should strengthen efforts to accumulate provisions and expand capital in preparation for the possibility of deteriorating loan soundness."

It also added, "Policy authorities need to strengthen selective support centered on vulnerable groups in terms of finance and income to prevent the expansion of credit risk among vulnerable borrowers from undermining financial stability."

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