[Geuman Report] Record High Debt Among Companies Due to Surge in Real Estate PF Loans

Rapid Increase in Real Estate Loans Centered on Small and Medium Enterprises

As loans related to real estate project financing (PF) have surged, the debt levels of companies have also risen to record highs.

According to the Bank of Korea's Financial Stability Report on the 28th, the corporate credit ratio relative to nominal Gross Domestic Product (GDP) reached 124.0% at the end of the second quarter this year, marking the highest level ever recorded.

In recent years, the number of companies borrowing, especially in real estate-related sectors, has increased significantly, leading to an overall rise in the corporate credit ratio.

Since the COVID-19 pandemic, loans in the real estate industry increased by approximately 175 trillion won, and in the construction industry by about 44 trillion won, representing the largest loan growth among all industries. The loan volume in real estate-related sectors accounted for 38.8% of the total loan increase across all analyzed industries (567 trillion won).

Lee Jong-ryeol, Deputy Governor of the Bank of Korea, is speaking at the "Bank of Korea 2023 Financial Stability Report Briefing" held on the morning of the 28th at the Bank of Korea press room in Jung-gu, Seoul. Photo by Yonhap News

The analysis suggests that the increase in real estate-related loans is due to the downturn in the real estate market. In particular, loans related to real estate PF have increased mainly among small and medium-sized enterprises (SMEs).

Since COVID-19, corporate loans from non-bank sectors such as mutual finance, savings banks, and specialized credit finance companies have surged, raising the share of non-bank loans from 25.7% at the end of 2019 to 32.3% at the end of the third quarter of 2023. Of the non-bank corporate loans, 94% were SME loans, with increases centered on real estate and wholesale and retail sectors.

By maturity, the proportion of short-term loans (within one year remaining maturity, based on bank corporate loans) and short-term bonds has risen. As of the third quarter, short-term loans maturing within one year amounted to 897 trillion won, accounting for 67% of bank corporate loans. For bonds (commercial papers, corporate bonds, overseas bonds), the share of short-term bonds with remaining maturity of one year or less increased from 23.1% at the end of 2019 to 37.4% at the end of the second quarter this year. This is interpreted as an increase in the proportion of short-term credit due to worsening economic conditions.

When comparing the borrowing ratio of companies with weak repayment ability to past crises, it was found to be significantly lower than during the foreign exchange crisis but close to or slightly exceeding the levels during the global financial crisis, depending on the indicator. Vulnerable companies were found to have lower interest coverage ratios and debt repayment ratios than during the 2008 global financial crisis.

However, the Bank of Korea judged that the proportion of companies at risk of insolvency (with a default risk exceeding 5%) remains significantly lower in both number of companies and borrowing compared to the two past crises, indicating that credit-related risks have not greatly expanded qualitatively.

The Bank of Korea analyzed that loans to the real estate industry, mainly from non-bank sectors, have been supplied at volumes exceeding the added value, thereby reducing the efficiency of the financial system. Accordingly, it pointed out the need to appropriately manage regulatory arbitrage by region to prevent excessive corporate credit supply to specific sectors such as real estate PF.

A Bank of Korea official emphasized, “Given the high uncertainty in the real estate market, policy authorities should reassess the feasibility of PF projects based on various scenarios to determine whether to provide support. While continuing selective support for companies temporarily facing liquidity shortages, restructuring through asset sales and other self-help efforts should be encouraged for companies assessed as having difficulty continuing operations.”

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