Increase in Corporate Loans... Rising Need for Risk Management in Financial Institutions

Increase in Manufacturing Loans Amid Raw Material Shortage
Financial Sector Risk Rises if Repayment Ability Declines

The export shipment dock at Hyundai Motor Company's Ulsan Plant. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As domestic corporate loans, especially in the manufacturing sector, increase, there is a growing outlook that risk management by domestic financial institutions will become even more necessary.

According to the Bank of Korea on the 11th, the outstanding loan balance by industry of deposit-taking institutions increased by approximately 64 trillion KRW in the first quarter of this year compared to the previous quarter. Loans from deposit banks increased by 28.1 trillion KRW, and loans from non-bank institutions increased by 35.8 trillion KRW.

In particular, manufacturing loans increased the most, by about 13 trillion KRW compared to the previous quarter. Among these, the loan growth in the chemical and utility sectors was notable, which is attributed to the rise in energy and raw material prices. Junsoo Kim, a researcher at Kiwoom Securities, explained, "As also reflected in the trend of the Business Survey Index, corporate sales and export performance, which had gradually been recovering since the COVID-19 pandemic in 2020, began to slow down again from the second half of last year, but raw material purchasing expenses remain at a high level. Ultimately, the burden of raw material costs in manufacturing is leading to an increase in loans."

Loans by financial institutions showed a slight contraction in the second half of last year but have been increasing again in the first quarter of this year. Specialized credit finance companies, centered on card companies and capital companies, have focused on external growth. Additionally, under an accommodative monetary policy stance and government financial support, the occurrence of delinquencies or non-performing loans has steadily decreased, resulting in sound financial indicators for financial institutions.

However, researcher Kim pointed out that risk management, such as provisioning for loan losses, has not been proactive relative to loan growth. Banks set aside around 2 trillion KRW in provisions each quarter in 2020, but this decreased to about 1 trillion KRW per quarter last year. Even in the first quarter of this year, when market interest rates rose sharply and interest income increased significantly, provisioning did not reach 1 trillion KRW.

Kim forecasted, "With the increase in domestic and international benchmark interest rates, corporate financial cost burdens are rising, and performance is slowing due to the rise in raw material prices, leading to a deterioration in repayment capacity while loans by financial institutions are increasing. The risk from non-financial industries is expected to increasingly transfer to financial institutions, so financial institutions must manage soundness and take preemptive measures against the occurrence of delinquencies."

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