Secondary Financial Institutions' Loans Increase by 3.46 Trillion KRW in February... Concerns Over Potential Non-Performing Loans

[Asia Economy Reporters Kim Hyo-jin and Kim Min-young] It has been revealed that loans from the secondary financial sector surged significantly during February, when the impact of the novel coronavirus infection (COVID-19) became full-fledged. This is interpreted as a result of self-employed individuals and small-scale corporations, who find it difficult to obtain bank loans, flocking to these institutions. As the effects of COVID-19 accumulate, their repayment capacity is inevitably expected to decrease further, raising concerns about potential defaults.

According to the Bank of Korea's Economic Statistics System on the 20th, the loan balance of the secondary financial institutions (non-bank financial institutions) such as savings banks, credit unions, mutual finance, and Saemaeul Geumgo stood at 548.8457 trillion won as of the end of February, an increase of 3.4606 trillion won (0.63%) compared to the end of January.

The loan balance at the end of January had risen by 1.5727 trillion won (0.28%) compared to the end of December last year, reaching 545.0251 trillion won. The increase in February thus far exceeded twice that of January.

According to financial authorities and the financial sector, the delinquency rate of mutual finance had already risen by 0.39 percentage points to 1.71% at the end of last year compared to 1.32% at the end of the previous year. Savings banks managed to reduce their delinquency rate slightly to 3.7% from 4.3% at the end of the previous year, but the situation has rapidly worsened this year.

An official from a savings bank said, "The delinquency rate in the past one to two months appears to have increased by more than 10% compared to the end of last year or early this year," adding, "It is very rare to find institutions that have continuously succeeded in managing delinquency rates." It is also known that the loan volume to individual business owners, most of whom are self-employed, has steadily increased this year.

Another savings bank official explained, "For credit grades around 6 to 7, the loan approval rate is mostly below 10%," adding, "Nevertheless, the fact that loans are increasing means that demand has grown that much."

The official further stated, "Although measures such as loan maturity extensions and interest payment deferrals related to COVID-19 will prevent related indicators from deteriorating sharply in the short term, it does not mean that defaults will disappear."

Financial authorities are also closely monitoring delinquency rates in the secondary financial sector. A financial authority official expressed concern, saying, "The shock of COVID-19 has not yet been fully reflected in major financial indicators," and added, "Potential risks centered on vulnerable groups such as the self-employed could soon materialize."

The slight rise in loan delinquency rates in the banking sector also heightens concerns. As of the end of February, the delinquency rate in domestic banks was 0.43%, marking two consecutive months of increase. An official from a commercial bank pointed out, "It is necessary to carefully manage the situation to prevent a vicious cycle where bank sector defaults spread to the secondary financial sector and the repercussions of defaults within the secondary financial sector affect the banking sector."