Concerns Over Bank Soundness Increasing Despite Record Low Levels of Non-Performing Loans and Delinquency Rates

[Asia Economy Reporter Song Hwajeong] Although the non-performing loan ratio and delinquency rate in the banking sector are at historically low levels, concerns about asset quality are gradually increasing. This is because the maturity extension and repayment deferral measures for loans to small business owners and small and medium-sized enterprises (SMEs) have been extended for another six months, and household loans are expected to increase again due to moves to ease loan regulations.

According to the Financial Supervisory Service (FSS) on the 26th, the non-performing loan ratio of domestic banks at the end of last year was 0.5%, down 0.14 percentage points from the end of the previous year, marking the lowest level for six consecutive quarters since the third quarter of 2020.

Newly generated non-performing loans 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 non-performing corporate loans was 8.3 trillion won, down 10.5 percentage points, and new non-performing household loans were 2.1 trillion won, sharply reduced by 25.3%.

The delinquency rate also remains at historically low levels. At the end of January, the delinquency rate on won-denominated loans at domestic banks (based on principal and interest overdue by one month or more) was 0.23%, up 0.02 percentage points from 0.21% at the end of the previous month. Compared to the same month last year, it fell by 0.08 percentage points. Although it rose slightly compared to the previous month, it is still at a low level. The delinquency rate tends to rise during the quarter as banks strengthen management of overdue loans at the end of the quarter, then fall at the quarter-end.

Although the banks’ asset quality indicators are favorable, the situation is not reassuring. This is due to the effect of maturity extension and repayment deferral measures for loans to small business owners and SMEs, which have masked potential non-performing loans. While these are currently classified as performing loans, the possibility that they may become non-performing in the future cannot be ruled out. Furthermore, the government has decided to extend the maturity extension and repayment deferral measures for small business owners and SME loans for another six months until the end of September, increasing concerns about potential non-performing loans.

The FSS pointed out, "It is necessary to proactively prepare for the possibility of an increase in non-performing loans during the normalization process of various financial support measures such as maturity extensions and repayment deferrals."

Recent moves to ease loan regulations may also pose a burden on asset quality in the future. Recently, the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?decided to lift restrictions on jeonse (long-term lease) loans, which had been maintained to slow the growth rate of household debt. These banks decided to expand the jeonse loan limit from the previous 'within the range of the increased deposit' to 'within 80% of the deposit stated in the renewal contract,' and also extended the application period for jeonse loans.

Jeon Baeseung, a researcher at eBest Investment & Securities, said, "If the easing of jeonse loan regulations and competition expand, the growth of household loans will rapidly resume," adding, "If the loan regulation easing promised by President-elect Yoon Seok-yeol materializes, the household loan growth rate in the financial sector, which has recently entered the 5% range, could rise again." He added, "The burden of increasing household debt in a rising interest rate environment could ultimately act as a factor weighing on the soundness of the banking sector."

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