Bank Loan Delinquency Rate Hits 9.5-Year High in South Korea

South Korea's commercial banks are facing a significant increase in loan defaults, with the delinquency rate for won-denominated loans reaching 0.67% as of the end of May. This marks the highest level recorded in approximately nine and a half years, signaling a worsening financial landscape for both businesses and households.

The latest figures from the Financial Supervisory Service (FSS) show a notable rise from 0.61% at the end of April and 0.64% a year prior. The increase is attributed to a combination of factors, including expanded lending for productive financial activities and shifts in interest rate conditions. The FSS anticipates that this upward trend in delinquency rates is likely to persist.

In May alone, new delinquencies amounted to 3.3 trillion won, an increase of 400 billion won from the previous month. While 1.5 trillion won in overdue loans were resolved, the net effect was a rise in overall non-performing loans. The delinquency rate for corporate loans climbed to 0.84% from 0.74% in April, with both large corporations and small and medium-sized enterprises (SMEs) experiencing higher default rates. SME loan delinquency specifically rose to 1%.

Household loan delinquency also saw an uptick, reaching 0.45% from 0.42% in April, although it remains slightly lower than the 0.47% recorded in May of the previous year. Mortgage loan delinquency edged up to 0.31%, while other loans, such as credit loans, saw their delinquency rate increase to 0.9%. The FSS is now guiding banks to bolster their asset management practices and enhance their capacity to absorb losses through measures like the active sale of non-performing loans and adequate provisioning of capital and loan-loss reserves.