Securities Firms' Real Estate PF Loan Delinquency Rate Surpasses 8%... Secondary Financial Sector on Alert

According to data received by Rep. Kim Sung-joo's office from the Financial Supervisory Service

Delinquency rates on real estate PF loans rising mainly among securities firms

Due to delays in permits, rising raw material prices and interest rates, and increase in unsold units

High risk of defaults as many loans are to small and medium-sized businesses for housing and commercial buildings

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] Since entering the period of interest rate hikes, the real estate market has cooled down, but costs such as construction raw material prices have increased, leading to a rise in delinquency rates on real estate project financing (PF) loans in the secondary financial sector. In particular, the secondary financial sector faces greater risk of default because most real estate PF loans are concentrated among small and medium-sized businesses such as residential and commercial buildings.

Rising Delinquency Rates on Securities Firms' PF Loans: 6.4% → 7.1% → 8.2%

According to the 'Delinquency Rates on Real Estate PF by Financial Sector' submitted by the Financial Supervisory Service to Rep. Kim Sung-joo of the Democratic Party on the 25th, the default rate among securities firms in the secondary financial sector increased most noticeably. As of the end of September, the delinquency rate on securities firms' PF loans (balance of 4.5 trillion KRW) was 8.2% (approximately 370 billion KRW). The delinquency rate rose from 6.4% at the end of March to 7.1% at the end of June, and exceeded 8% in the third quarter.

The situation is similar in other secondary financial sectors. Savings banks had a PF loan balance of about 10.7 trillion KRW, of which 2.4% (approximately 260 billion KRW) was delinquent. The delinquency rate showed a trend of 2.0% → 1.8% → 2.4% during the same period. Specialized credit finance companies (balance of 27.1 trillion KRW) also showed an upward trend in delinquency rates (1.0% → 0.8% → 1.07%).

A Financial Supervisory Service official explained, "Delays in local government permits, recent increases in raw material prices and interest rates leading to higher construction costs, rising unsold inventory, and worsening real estate market outlooks are expected to cause difficulties in project progress, resulting in delinquencies."

Secondary Financial Sector's PF Loan Clients Also Centered on Small and Medium-Sized Businesses

Another issue is that the clients of PF loans in the secondary financial sector are more vulnerable compared to banks or insurance companies. The Financial Stability Report released by the Bank of Korea the day before stated, "While banks and insurance companies handle PF loans related to apartment construction, the secondary financial sector mainly deals with PF loans related to housing other than apartments and commercial facilities," adding, "As of the end of June this year, the proportion of apartment PF loans was 66% for banks, but only 21.6% for securities firms and 15.1% for savings banks."

Looking at loan sizes, banks and insurance companies focus on large-scale projects, while the secondary financial sector centers on small and medium-sized projects. The average PF loan amount per case was much smaller in the secondary financial sector compared to banks: 270 billion KRW for banks, versus 110 billion KRW for specialized credit finance companies, 61 billion KRW for securities firms, and 25 billion KRW for savings banks. This indicates that the business viability of PF loans in the secondary financial sector is lower, increasing the likelihood of defaults. In fact, the delinquency rates on real estate PF loans for banks and insurance companies were 0.03% and 0.4%, respectively, as of the end of September, much lower than those in the secondary financial sector.

The report analyzed, "With increased risk aversion due to past learning effects from real estate PF loan defaults, the linkage between the capital market and real estate PF loans has strengthened, and the expansion of non-bank loans with insufficient capital could pose a shock to the financial system."

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