"Rising Delinquency Rates" Savings Banks Urged to "Further Strengthen Soundness"

Additional Loan Loss Provisions for Multiple Debtors
Strengthened Regulations on Real Estate-Related Loans

Orders have been issued to strengthen soundness management in the savings bank industry, where the delinquency rate continues to rise.

According to the financial sector on the 17th, the Financial Services Commission held a regular meeting on the 13th and approved the "Partial Amendment to the Mutual Savings Bank Business Supervision Regulations." First, from July next year, savings banks must additionally set aside loan loss provisions for multiple debtor loans. This means that the more financial institutions a borrower has loans with, the more provisions must be accumulated. For loans to customers using 5 to 6 financial companies, 130% of the required loan loss provision rate must be set aside, and for borrowers using 7 or more financial companies, 150% must be accumulated.

Until now, the number of financial companies used by the borrower was not considered when setting aside loan loss provisions for savings banks. Only the minimum provision rate was set according to the classification of loan asset soundness. For household loans, the rates are 1% for normal, 10% for precautionary, 20% for substandard, 55% for doubtful, and 100% for estimated loss. On the other hand, additional loan loss provision regulations for multiple debtors (5 or more for mutual finance, 2 or more for cards) have already been applied in other sectors such as mutual finance and credit cards.

The obligation to additionally set aside loan loss provisions for multiple debtors has been imposed on savings banks because the speed of deterioration in soundness is serious. According to the Financial Supervisory Service, as of the end of June, the delinquency rate of all 79 savings banks was 5.33%, up 1.92 percentage points from 3.41% at the end of last year, and also higher than 5.1% in the first quarter.

With the possibility of further base rate hikes in the second half of this year, the need to proactively strengthen loss absorption capacity has increased. Multiple debtors with large debt amounts or low credit ratings are considered the "weak link" with a high risk of default during interest rate hikes. According to an analysis of NICE Information Service data by Professor Lee Yoon-soo of the Department of Economics at Sogang University, while the delinquency rate of all household loan holders has remained in the 2% range since 2019, the delinquency rate of vulnerable borrowers such as multiple debtors with debts at three or more financial institutions rose from about 20.0% in the third quarter of 2021 to 23.6% in the second quarter of this year.

Regulations on real estate loans, also considered a financial market time bomb, will be strengthened. Savings banks have credit exposure limits for real estate-related industries (within 30% for construction, 30% for real estate, and 20% for project financing), but the credit exposure limit regulations will now be applied based on the actual borrower responsible for principal and interest repayment, not just the nominal borrower. Previously, loans could bypass regulations if the nominal borrower was a special purpose company (SPC) or similar. This regulation will take effect immediately upon promulgation.

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