As domestic and external economic conditions show no signs of improvement, commercial banks' loan delinquency rates are steadily deteriorating. According to the financial sector on the 28th, the simple average of total delinquency rates at Korea's five major banks — KB, Shinhan, Hana, Woori and NH Nonghyup — stood at 0.40% at the end of the first quarter, up 0.06 percentage point from 0.34% at the end of the fourth quarter last year. In particular, Hana Bank's overall delinquency rate hit 0.39%, the highest in nine years, while NH Nonghyup Bank's household delinquency rate reached 0.46%, the worst in roughly a decade since the third quarter of 2016. Of particular concern is the sharp rise in non-performing loans (NPLs), or bad debts overdue for more than three months. The combined NPL balance at KB Kookmin, Shinhan, Hana and Woori Bank stood at 5.0773 trillion won ($3.7 billion) at the end of March, swelling 11.6% from the end of last year.
The recent rapid deterioration in banks' asset quality appears to stem from borrowers' weakened repayment capacity amid a sluggish real economy, compounded by the shock of the Iran war in the Middle East and domestic interest rate hikes. Above all, the problem of bank loans to vulnerable borrowers such as small and medium-sized enterprises (SMEs) and small business owners turning sour is serious. While the semiconductor sector, a pillar of the Korean economy, is enjoying an unprecedented boom driven by an artificial intelligence (AI)-led super cycle, conditions in other economic sectors remain difficult, leading to deteriorating bank loans. To make matters worse, the Iran war has passed two months and shows signs of becoming prolonged, making it difficult to expect any near-term improvement in economic conditions.
Financial authorities and banks must take preventive action so that the real economic slump caused by the Middle East shock and other factors does not become amplified. At the same time, they must draw up balanced measures to minimize the deterioration of loan assets. Now is the time to focus on carefully monitoring market liquidity conditions to prevent a credit crunch for businesses and households, while distinguishing viable borrowers and supplying funds in a timely and sufficient manner. In particular, there is a need to closely watch sectors such as real estate and rental businesses, where loan delinquency rates are rising sharply, and manage risks with precision. A comprehensive prescription is urgently needed to ease financial cost burdens and support credit management for construction firms and exporters on the brink of survival due to raw material supply difficulties caused by the Iran war. However, insolvent bad loans should be boldly cleaned up to prevent zombie companies from surviving on financial support. It goes without saying that each bank must build up solid buffers, including loan loss provisions.
