South Korean banks' bad loans hit highest level since COVID-19 peak amid weak demand

South Korean banks are grappling with a significant increase in non-performing loans, reaching their highest level since the early stages of the COVID-19 pandemic. The combined balance of bad loans across the nation's five largest banks, KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup, climbed to 6.41 trillion won (approximately $5.7 billion) by the end of June, a 23.4% jump from the previous year.

The proportion of these non-performing loans, which are those on which interest payments are not being recognized or principal and interest payments are overdue by more than three months, now stands at 0.34% of total loans. This marks a 0.05 percentage point increase from the same period last year and matches the rate seen in June 2020, signaling growing financial distress among borrowers.

Experts attribute this deterioration to a confluence of factors. Prolonged weakness in domestic demand, coupled with a sustained period of high interest rates that began even before the central bank's policy rate hikes, is making it difficult for many households and businesses to service their debts. The impact is particularly acute for small and medium-sized enterprises and self-employed individuals operating in the commercial real estate sector, where rising vacancy rates and falling auction success rates have worsened their financial situations.