Rising Delinquency Rates in Small and Medium Savings Banks... Realization of Real Estate and Construction-Induced Crisis

PF Delinquency Rate Rises from 0 to 10.2% in One Year
Interest Rate Hikes and Kim Jin-tae's 'Legoland' Impact
Warning Signs for Savings Banks with Large Construction and Real Estate Exposure

[Asia Economy Reporter Song Seung-seop] The delinquency rates in the real estate and construction sectors of small and medium-sized savings banks have severely deteriorated. Although overshadowed by statistics from large-scale companies, some institutions have delinquency rates reaching 30%. Concerns are rising that the worsening real estate and construction market due to rapid interest rate hikes is undermining the soundness of the secondary financial sector.

On the 27th, Asia Economy reviewed the first half real estate-related loans of 79 savings banks and found many companies with delinquency rates in the tens of percent by sector. The top five companies with the highest delinquency rates in project financing (PF), construction, and real estate loans were mostly small-scale firms located in provincial areas. Among the 12 savings banks in the top five of the three sectors (with three overlaps), only two were located in Seoul.

Johung Savings Bank, located in the Busan-Gyeongnam region, has a delinquency rate (overdue by more than one month) of 29.61%. Out of 28.7 billion KRW disbursed, only 13.6 billion KRW is performing loans. The delinquent amount alone is 8.5 billion KRW. Looking solely at the rental business, 8.5 billion KRW out of 26.9 billion KRW has not been recovered, resulting in a delinquency rate of 31.59%. With total loans of 236.9 billion KRW, it is a small-scale company, but the non-performing loan ratio (overdue by more than three months) is 17.29% with 40.9 billion KRW in unrecoverable loans. Considering that large savings banks have non-performing loan ratios in the 0-2% range, this is a serious level.

It is also problematic that these companies rely heavily on real estate loans for most of their operations. Woori Savings Bank, which had the second-highest delinquency rate at 14.02%, extended 43.5 billion KRW in credit to the real estate sector. Combining PF loans and construction loans, the total is 94.2 billion KRW. This accounts for 37.7% of the total loans of 249.8 billion KRW managed during the same period. Compared to household loans of 23.1 billion KRW, it is about three times larger. The structure inevitably suffers a significant impact from the downturn in the real estate market.

PF Delinquency Rate Rises from 0% to 10.22%, Savings Banks’ Soundness 'Warning'

In the construction sector, savings banks with worsening delinquency rates have emerged one after another. S&T Savings Bank had the highest rate at 22.77%, nearly quadrupling from 5.97% a year ago. The construction market is rapidly cooling this year due to rising raw material prices caused by fast inflation and unstable material supply. Pureun Savings Bank’s delinquency rate was also at a risky level of 21.64%, followed by Asan (16.89%), Must Samil (13.1%), and MS (10.14%).

In PF, Baro Savings Bank’s delinquency rate jumped from 8.44% to 14.42% in one year. Out of 153.9 billion KRW, 22.2 billion KRW is delinquent. A Baro Savings Bank official explained, "We have been continuously reducing PF loans, and as the PF loan volume decreased, the delinquency rate increased somewhat," adding, "Total loans amount to 1.5 trillion KRW, and the overall delinquency rate is in the 3% range, so there is no problem with soundness." PF is a financing method that lends money based on the feasibility of a project. In savings banks, ‘bridge loans’?where initial PF money is lent and profits are earned when the main PF is executed by commercial banks?were common. Recently, with rising base interest rates and stricter handling of main PF by commercial banks, risks have increased. Central Savings Bank also had a 0% delinquency rate last year with all 14.6 billion KRW in PF loans performing normally, but this year it surged to 10.22%.

Financial circles are already analyzing that a crisis has arrived. In economics, delinquency rates typically rise as a lagging indicator after the economy worsens, but delinquency rates have already soared in several savings banks. Especially last month, when Governor Kim Jin-tae of Gangwon Province declared the default of the Legoland operator, the funding market froze. Despite government efforts to stabilize the situation, if funding does not improve, the secondary financial sector will inevitably face losses in the third and fourth quarters.

An official from a savings bank explained, "Banks increasingly refuse to extend loans unless interest rates are raised significantly," adding, "With a shortage of funds and rising raw material prices, construction cannot proceed, causing related companies to falter together."

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