Savings Banks Growing Larger, but the 'Quality' of Loans Continues to Deteriorate

6 out of 10 Savings Bank Borrowers Are Multiple Debtors
From 60% in 2018 to 66% in the First Half of Last Year
Multiple Debtors with Small Loans Repay Less
Korea Credit Rating Agency: "Relatively Clear Deterioration in Soundness"

The practice of savings banks easily lending money to low-credit borrowers has helped them grow in size, but it raises concerns that the quality of loans may deteriorate. In particular, warnings have emerged that the risk of defaults could increase amid rising benchmark interest rates and tightening policies in major countries worldwide. There are also concerns that if loans grow excessively, risks linked to vulnerable borrowers could become even greater.

According to the savings bank industry on the 12th, among the top 10 savings banks by asset size last year, seven issued the most unsecured personal credit loans to borrowers in the lowest 10%, the first income quintile. In the case of apartment mortgage loan products, three out of seven banks fell into this category.

Experts express concerns about the quality of the expanded loan portfolio in the savings bank sector. This is because a significant number of multiple debtors who have borrowed from three or more financial institutions, or vulnerable groups with weak income and credit bases, are concentrated in this sector compared to other financial sectors.

According to the "Analysis of Characteristics of Savings Bank Credit Loan Borrowers and Implications" report published last year by the Korea Credit Information Services, six out of ten savings bank borrowers are multiple debtors. While the banking sector has maintained a stable ratio of 29% over the past three years, the savings bank ratio has been rising from 60% in 2018 to 66% in the first half of last year.

The high delinquency rate among multiple debtors in savings banks is also problematic. The delinquency rate refers to the proportion of borrowers classified as non-performing. Borrowers who experienced long-term delinquency (over 90 days) within one year were classified as non-performing. The delinquency rate was higher among those who borrowed smaller amounts. This means that low-credit borrowers, who find it difficult to secure lump sums and tend to cover living expenses through loans, were less able to repay their loans.

Financial Support Measures Ending... Interest Burden on Vulnerable Borrowers Likely to Increase

The delinquency rate for savings bank borrowers who borrowed less than 10 million KRW is 7.3%, about six times higher than the 1.2% rate in the banking sector. For multiple debtors, the delinquency rate rises to 8.7%, more than one percentage point higher. Narrowing down to borrowers with loans under 3 million KRW, the overall delinquency rate drops to 6.8%, but for multiple debtors it rises to 10.3%.

Last month, Korea Credit Rating also pointed out in a report that "savings banks have seen an increase in the fixed non-performing loan ratio in extended loans, revealing signs of deterioration," and "although the amounts are not large, the borrower's credit quality decline is relatively clear." In particular, loans with deferred principal repayments had a fixed non-performing loan ratio of 78.3%, much higher than the banking sector's 1.4%.

Loans to sensitive industries severely affected by COVID-19 have also rapidly increased, centered on savings banks and capital companies. This is due to a large influx of low-credit borrowers who cannot obtain loans from first-tier financial institutions. In the third quarter of last year, the growth rate of loans to sensitive industries by savings banks was 25%, about 10 percentage points higher than the 15% growth rate for non-sensitive industries.

In September, loan maturities that were considered normal due to financial support measures will come due. Most experts expect that when interest repayments begin, indicators of soundness such as delinquency and default rates will worsen. With additional benchmark interest rate hikes anticipated, loan interest rates are expected to rise, increasing the interest repayment burden on vulnerable borrowers.

Loans that savings banks have judged difficult to recover and have written off or sold are already increasing rapidly. Last year, the five largest savings banks wrote off or sold loan receivables worth 399.5 billion KRW, an increase of 99.4 billion KRW (33.1%) from 300.1 billion KRW a year earlier.

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