Banks Lower Household Loan Thresholds in Q1... Impact of Expanded Mortgage Refinancing Loans

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

In the first quarter of this year (January to March), domestic banks in South Korea are expected to lower the lending threshold for households despite strengthened regulations on household loans.

According to the "Financial Institution Lending Behavior Survey Results (Q4 2023 Trends and Q1 2024 Outlook)" released by the Bank of Korea on the 23rd, the lending attitude outlook index for domestic banks in the first quarter of this year rose by 11 points to 5, compared to -6 in the previous quarter.

This survey, conducted with the chief credit officers of a total of 204 financial institutions, calculates an index between 100 and -100 by weighting evaluations of financial institutions' lending attitudes, credit risks, and loan demand.

The lending attitude toward households is expected to slightly ease due to factors such as the expanded use of refinancing infrastructure for mortgage loans. In December last year, the Financial Services Commission decided to expand the scope of loans eligible for refinancing infrastructure from existing unsecured loans to apartment mortgage loans and jeonse (long-term deposit) loans.

For corporations, a more relaxed attitude is also expected, mainly for loans to large enterprises.

In the first quarter, corporate credit risk is expected to remain high, especially among small and medium-sized enterprises, due to deteriorating debt repayment capacity 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 sector rose from 0.41% at the end of 2022 to 0.76% at the end of September last year, and in the accommodation and food services sector, it increased from 0.47% to 0.89% during the same period.

Household credit risk is also expected to rise due to increased interest burdens caused by rising loan interest rates. The household loan interest rate increased from 4.66% at the end of last year to 5.08% at the end of November, and the delinquency rate rose from 0.24% to 0.39% during the same period.

Corporate loan demand in the first quarter is expected to continue increasing amid ongoing demand for working capital, persistent domestic and international economic uncertainties, and concerns over polarization in the corporate bond market. The Bank of Korea explained that the aftermath of the Taeyoung Construction incident is likely to deepen polarization in the corporate bond market among industries due to increased concerns over insolvency in construction and real estate project financing (PF)-related sectors.

Household loan demand is expected to remain neutral for general household loans due to delayed economic recovery and high interest rates. However, household mortgage loans are likely to see a slight increase, mainly in jeonse loans, due to rising jeonse prices caused by a decrease in pre-sale and move-in volumes.

Lending attitudes of non-bank financial institutions are expected to maintain a tightening stance across all sectors except life insurance companies. The Bank of Korea explained, "Mutual savings banks and mutual finance cooperatives are expected to continue strengthening lending attitudes to manage credit soundness, as high delinquency rates persist mainly in real estate-related corporate loans. In contrast, life insurance companies are expected to somewhat ease lending attitudes, focusing on high-quality customers, based on relatively sound credit conditions."

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