Bank Delinquency Rates Still Low... Growing Need for Enhanced Credit Loss Management

[Asia Economy Reporter Song Hwajeong] Although the delinquency rate of domestic banks remains at a low level, there is a growing possibility of increased credit risk in the future, leading to expectations that banks' loan loss burdens will also expand.

According to the Financial Supervisory Service on the 19th, the delinquency rate on won-denominated loans at domestic banks as of the end of September (based on principal and interest overdue by one month or more) was 0.21%, down 0.03 percentage points (P) from the end of the previous month (0.24%). Compared to the same period last year, it decreased by 0.02 percentage points.

By sector, the delinquency rate for corporate loans was 0.23%, down 0.04 percentage points from the end of the previous month (0.27%). The delinquency rate for large corporate loans fell 0.07 percentage points to 0.05% from 0.13% at the end of the previous month. The delinquency rate for small and medium-sized enterprise (SME) loans dropped 0.03 percentage points to 0.27% compared to the previous month, with the delinquency rate for small and medium-sized corporations at 0.33%, down 0.05 percentage points, and the delinquency rate for individual business owner loans at 0.19%, down 0.01 percentage points. Researcher Jeon Baeseung of Ebest Investment & Securities analyzed, "Corporate loans led the overall decline in delinquency rates, with the large corporate delinquency rate hitting a record low of 0.05%. However, the decline in SME delinquency rates has narrowed compared to the same period last year, and the delinquency rate for individual business owners has remained at the same level as the previous year in August and September."

The delinquency rate for household loans was 0.19%, down 0.01 percentage points from the end of the previous month but up 0.03 percentage points compared to the same period last year. The delinquency rate for mortgage loans remained similar at 0.12%. The delinquency rate for household loans excluding mortgage loans (such as credit loans) decreased by 0.05 percentage points to 0.37%. Researcher Jeon explained, "Since July, the household loan delinquency rate has been maintained at 1 to 2 basis points (1bp = 0.01 percentage points) higher than the same period last year. Other loans (credit loans) have shown an increasing trend compared to the previous year, and in September, the rate reached 0.37%, up 7 basis points from September 2021." He added, "Ultimately, the surface-level delinquency rate in the banking sector remains low, mainly due to the low delinquency rate of corporate loans, especially large corporate loans. However, household loans are showing an upward trend compared to the previous year, and the downward trend in delinquency rates for SMEs and SOHO loans has come to a halt."

The loan loss burden for banks is likely to increase in the future. Researcher Jeon stated, "The reason corporate loan delinquency rates remain low is due to COVID-19-related financial support measures and a recent surge in corporate loans amid instability in the corporate bond market, reflecting increased liquidity demand, so delinquencies and defaults have not yet appeared. However, if rapid interest rate hikes and economic downturn materialize, there is a high possibility that credit risks will expand, especially among vulnerable SMEs and self-employed individuals." He forecasted that new household loan defaults, which are closely related to interest rate levels, will continue to rise. The rising delinquency trend, starting with credit loans, is expected to gradually spread to the mortgage loan sector as the housing market cools.

Researcher Jeon also noted, "In the case of savings banks, risks related to real estate project financing (PF) and concerns about the soundness of general borrowers are simultaneously emerging. Leading indicators of credit risk across the financial sector, such as delinquency transition rates of card companies and capital companies, are showing negative trends. Although the increase in loan loss rates in the banking sector will be lower than during past economic recessions, a gradual expansion of loan loss burdens is inevitable."

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