NPL Sales to Reach 4 Trillion Won in H1...Mutual Finance Sector Is the Wild Card

The volume of non-performing loan (NPL) sales in the first half of this year is expected to reach around 4 trillion won, similar to last year. This is because, despite cuts in the base interest rate, the environment of high inflation and a strong dollar-won exchange rate continues, and delinquencies in the mutual finance sector are increasing rapidly. As new non-performing loans are piling up faster than existing ones are being resolved, pressure on asset quality across the financial sector is also expected to intensify.

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According to a report on NPL market trends by Samil PwC (Samil Accounting Corporation) released on the 11th, domestic banks sold about 8.1 trillion won in non-performing loans last year, based on outstanding principal balance (OPB). This was because, as delinquency rates began to rise from 2023, banks moved preemptively to clean up bad assets in order to prevent the spread of non-performing loans. The volume of NPL sales had been on a decline until 2022, but increased again to 8.3 trillion won in 2024. Banks classify loans that are delinquent for more than three months as “substandard or below.” Loans that reach this stage are regarded as difficult to collect normally and are managed as non-performing loans.

This trend is expected to continue for the time being. As full-scale restructuring of distressed real estate project financing (PF) is anticipated in 2026, the volume of NPL sales in the first half of this year is projected to be around 4 trillion won, similar to 2025.

The problem is that new delinquencies and non-performing loans are increasing more rapidly than banks can dispose of existing NPLs. Delinquency rates on loans extended by domestic banks are on an upward trajectory. As of November last year, the delinquency rate on won-denominated loans stood at 0.60%, up 0.08 percentage points from a year earlier, marking the highest level in seven years since 2018. The average delinquency rate for January to November last year was also 0.57%, about 0.1 percentage points higher than the full-year average of the previous year.

The ratio of non-performing loans to total loans was 0.57% as of the third quarter of last year. Although this represented a slight decline compared with the first and second quarters, it was still 0.04 percentage points higher than in the same period a year earlier. The simultaneous increase in delinquencies and non-performing loans is interpreted as indicating a broad-based deterioration in the quality of loan assets. Samil PwC pointed out that if the economic recovery is delayed and the downturn in the real estate market excluding housing is prolonged, the non-performing risk of borrowers with weak repayment capacity could materialize, leading to another increase in delinquent and non-performing loans in the banking sector.

In particular, in the mutual finance sector, loan quality is deteriorating as the volume of loans has expanded rapidly and the ratio of substandard-and-below loans (NPL ratio) has surged due to the impact of PF-related distress.

The total credit (loans) extended by mutual finance institutions has steadily increased since 2012, reaching 716.7 trillion won as of the end of June last year. Among this, the volume of substandard-and-below loans jumped 4.4 times, from about 12 trillion won at the end of 2021 to about 53 trillion won as of the end of June 2025. This is seen as the result of aggressively expanding PF-related credit to improve profitability amid a prolonged low interest rate environment, only to see those loans become non-performing all at once as the real estate market slumped and interest rates rose.

The ratio of substandard-and-below loans to total credit, a key asset quality indicator, had been managed at around 1-2%, but as PF loan distress became full-fledged from 2023, it soared to 7.4% as of the end of June 2025.

The concern is that the prolonged “triple burden” of high interest rates, high inflation, and a strong dollar-won exchange rate could further weaken the repayment capacity of small and medium-sized enterprises (SMEs) and vulnerable borrowers. According to the Financial Supervisory Service, the delinquency rate on SME loans rose to 0.89% in November last year, while the delinquency rate for small and medium-sized corporations in particular reached 0.98%, approaching 1%, indicating that default risk is growing especially among vulnerable borrowers.

As the burden of managing asset quality in the domestic financial sector has increased, Lee Chanjin, Governor of the Financial Supervisory Service, stated in the Financial Supervisory Service’s work plan on the 9th that, as part of financial market risk management, the agency will closely monitor the delinquency status of each mutual finance cooperative. He said the authority will check whether targets for reducing delinquency rates and NPLs are being met, dispatch resident examiners, and conduct special inspections for vulnerable cooperatives.

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