Banks Raise Loan Standards for Households and SMEs in Q4 Due to "Increased Credit Risk"

The Bank of Korea Announces Results of Financial Institutions' Lending Behavior Survey

In the fourth quarter of this year (October to December), domestic banks are expected to raise the lending threshold for households and small and medium-sized enterprises (SMEs) to manage risks.

According to the "Financial Institution Lending Behavior Survey Results (Trends in Q3 2023 and Outlook for Q4)" released by the Bank of Korea on the 30th, the lending attitude outlook index for domestic banks in the fourth quarter dropped 9 points to -11 compared to -2 in the previous quarter.

This survey, conducted with the heads of credit operations from a total of 204 financial institutions, calculates an index between 100 and -100 by weighting evaluations of lending attitudes, credit risk, and loan demand of financial institutions.

In the fourth quarter, corporate credit risk is expected to remain high, especially among SMEs, due to the deterioration of debt repayment ability in certain sectors such as construction and accommodation and food services, as well as among small self-employed businesses. The delinquency rate in the construction industry rose from 0.33% at the end of 2021 to 0.65% at the end of June this year, and in the accommodation and food service industry, it increased from 0.24% at the end of 2021 to 0.78% at the end of June this year.

Household credit risk is also expected to increase due to the rising interest burden caused by higher loan interest rates. The household loan interest rate rose from 3.01% at the end of 2021 to 5.03% at the end of August this year, and the delinquency rate increased from 0.16% to 0.38% during the same period.

The Bank of Korea explained, "For SMEs, the strengthened lending attitude is expected to be maintained due to enhanced risk management following the end of COVID-19 financial support. Lending attitudes toward households are expected to be tightened, especially for household housing loans, reflecting measures such as the implementation of management plans for long-term mortgage loans." The government announced on the 13th of last month a plan to limit the DSR (Debt Service Ratio) calculation period for 50-year mortgage loans to a maximum of 40 years. Regarding loans to large corporations, lending is expected to remain at a neutral level amid recent expansion in loan handling and ongoing domestic and external economic uncertainties.

Loan demand from corporations in the fourth quarter is expected to continue increasing for both large corporations and SMEs due to rising working capital needs amid ongoing domestic and external economic uncertainties. Household loan demand is expected to remain at a neutral level due to the slowdown in the real economy and rising interest rates.

Lending attitudes of non-bank financial institutions are expected to show a tightening trend across all sectors. The Bank of Korea stated, "The trend toward strengthening credit soundness management by non-bank financial institutions will be reflected due to increased economic uncertainty and rising delinquency rates."

[Image source=Yonhap News]

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