[Corporate Loan War]②High Interest Rates and Economic Downturn... Bleeding Competition and Concerns Over Soundness

"When I heard from the CEO of a small-to-medium enterprise (SME) that a certain bank offered an interest rate level, I thought it was a bluffing. They said the bank proposed an unbelievably low interest rate. But as I received similar inquiry calls from several company representatives, I realized that competition has become serious."

As commercial banks are successively expanding corporate loans, concerns are growing about 'cutthroat competition' among banks. Rapid loan expansion could negatively affect delinquency rates and profitability with a time lag.

According to the Financial Supervisory Service on the 25th, the corporate loan delinquency rate of domestic banks at the end of July was 0.41%, up 0.17 percentage points from the same month last year. This is lower than the 0.51% recorded at the end of January 2020, before the COVID-19 pandemic fully unfolded, but shows a sharp increase compared to the all-time low of 0.20% recorded at the end of June last year.

By category, the delinquency rate for large corporations decreased by 0.02 percentage points to 0.12%, but the delinquency rate for SMEs increased by 0.22 percentage points to 0.49%. In particular, the delinquency rate for small and medium-sized corporations rose by 0.17 percentage points to 0.51%, and for individual business owners, it increased by 0.28 percentage points to 0.45%.

A flyer related to private loans is placed at a closed store in Myeongdong, Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Although the current corporate loan delinquency rate is not high compared to the past, the rapid rise since the record low of 0.20% in June last year is a cause for concern. As the COVID-19 pandemic ends and countries worldwide maintain a high-interest rate stance, the previously suppressed delinquency rates are returning to normal levels.

Industry insiders express concerns about potential expansion of latent non-performing loans as banks join the corporate loan war one after another. A financial sector official said, "It has always been common for corporate loans to expand when household loan growth slows. However, this is like taking a stone from the bottom to plug the top; rapid expansion of loan assets can lead to increased delinquency rates after a 2-3 year lag, which can be burdensome."

In particular, the possibility of cutthroat competition among banks is also raised. According to disclosures by the Korea Federation of Banks, the interest rates on SME credit loans handled by the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) from May to July ranged from 5.49% to 6.57%, down from 5.58% to 6.83% during December last year to February this year.

An official from a commercial bank said, "When funding costs are similar, if price competition occurs, there is no choice but to reduce margins. Although banks try to compensate through deposit attraction or ancillary businesses, it ultimately is like taking a stone from the top to plug the bottom," he pointed out.

Another frontline bank official said, "Unlike before when close relationships with main banks were valued, recently SME managers react sensitively even to a 0.01 percentage point difference in interest rates. For companies that need to save every penny of interest cost amid high interest rates and economic recession, the current trend is not necessarily bad," he said.

Especially painful for banks is that reducing corporate loans directly leads to deposit and retirement pension outflows from those companies. Another official said, "As existing loans leave, it becomes difficult to achieve annual targets, and with deposits also flowing out, achieving key performance indicators (KPIs) is quite challenging. Relationship managers (RMs) in corporate finance face a double burden of retaining existing customers while finding new borrowers," he explained.

The industry believes that while this competition may not pose a serious threat to bank soundness immediately, it could lead to deteriorating profitability. A senior official at a commercial bank said, "Price competition will cause net interest margin (NIM) decline and profitability deterioration, but since each bank compensates through ancillary businesses, we do not expect negative margins or soundness issues across the industry. We plan to focus on maintaining long-term, high-quality customers," he stated.

Internet Banks Also Knock on Corporate Loan Doors... Still Limited

Meanwhile, internet-only banks, which are relatively smaller compared to commercial banks, are entering the corporate loan market through loans to individual business owners. Especially since last year, they have actively launched individual business owner loan products, leading to an increase in corporate loan balances.

As of the end of the second quarter this year, the corporate loan balance of KakaoBank, K Bank, and Toss Bank stood at 2.8912 trillion KRW, a 412% increase (2.3261 trillion KRW) compared to 565.1 billion KRW in the same period last year. Toss Bank, which proactively introduced the 'Boss Loan,' saw its corporate loan balance grow from 550.9 billion KRW in June last year to 1.8196 trillion KRW in June this year, making it the largest among the three.

The latecomer KakaoBank took a low-interest rate approach. According to the Korea Federation of Banks, KakaoBank's average interest rate on individual business owner credit loans (based on new loans from May to July) was 5.99%, the lowest compared to K Bank (6.44%) and Toss Bank (7.81%). K Bank has also recently expanded individual business owner loans by joining the loan brokerage platform 'Finda.'

However, it is not easy for internet-only banks to grow corporate loans like commercial banks. An official from an internet-only bank said, "While the authorities are managing household loans and we will focus more on individual business owner loans, these loans carry risks similar to mid-to-low credit loans, so actively expanding them is not easy," he said.

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