South Korean Bank Delinquencies Hit 10-Year High, Raising Corporate Credit Concerns
The delinquency rate on loans at South Korean banks reached its highest level in a decade as of the end of June, raising concerns over deteriorating corporate credit quality. While banks' aggressive cleanup of delinquent loans at the end of the quarter brought the rate down from the previous month,
South Korea's banking sector saw delinquency rates on loans hit a ten-year peak at the end of June, sparking worries about declining creditworthiness among businesses. Despite banks aggressively tackling delinquent loans in the final quarter, the rate still climbed from the previous month and a year ago. The delinquency rate for won-denominated loans stood at 0.56% by the end of June, up 0.04 percentage points from a year earlier and the highest level for June since 2016.
The rate dropped by 0.11 percentage points from 0.67% at the end of May, mainly due to banks writing off approximately 5.3 trillion won in delinquent loans at month-end, a seasonal effect that temporarily reduced the figure. The problem was mainly seen in corporate lending, with the corporate loan delinquency rate rising to 0.68%, up 0.08 percentage points from a year earlier.
Small and midsize corporations' delinquency rate jumped 0.13 percentage points to 0.92%, and individual businesses' delinquencies rose to 0.69%. In contrast, household loan delinquency fell slightly from a year earlier to 0.40%. The household mortgage delinquency rate fell to 0.28%, and other household loans, like unsecured credit, edged down to 0.77%.
Higher interest costs and tougher financing conditions contributed to the increase in corporate delinquencies. The yield on three-year AA- rated unsecured corporate bonds rose to 4.504% on Aug. 20, climbing over 100 basis points from the year's start. For a company borrowing 100 billion won, the annual interest burden surged by more than 1 billion won in just seven months.
Market interest rate hikes and a weaker corporate bond market have made it harder for companies to raise funds, leading them to rely on bank loans or delay financing, which puts more pressure on liquidity. Financial experts warned that companies' ability to service their debt could worsen if sluggish domestic demand and high interest rates continue.
The government and monetary authorities are closely monitoring the situation, with the Ministry of Finance and Economy pledging to monitor developments and encourage banks to bolster their loss-absorbing capacity and dispose of nonperforming loans. However, the overall delinquency rate decline in June might not indicate a real improvement in credit quality, as newly delinquent loans totaled 2.6 trillion won, leaving the rate open to a potential rise.
Written by urgent.news from BusinessKorea's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
