The Financial Supervisory Service reported on October 23 that the delinquency rate for domestic banks' won-denominated loans reached 0.69% at the end of August. This marks an increase of 0.06 percentage points from the previous month, the highest level recorded since October 2016. The prolonged high interest rates have raised concerns about the ability of businesses and households to repay their debts. Banks and financial authorities must act swiftly to address potential defaults before they escalate.
A closer look at the figures reveals even more alarming trends. The delinquency rate for small and medium-sized enterprise (SME) loans stands at 1.00%, with small corporations reaching 1.10%. The delinquency rate for individual business loans has also risen to 0.86%, an increase of 0.09 percentage points in just one month. While the overall household loan delinquency rate is 0.45%, credit loans, excluding mortgage loans, have surged to 0.91%. This indicates that the financial strain is particularly concentrated among SMEs, self-employed individuals, and households that have borrowed without collateral.
Another issue is that the pace of resolving new delinquencies is lagging. In August, the amount of newly reported delinquencies was 3 trillion won, a decrease from the previous month; however, only 1.5 trillion won in delinquent loans were resolved during the same period. This suggests that while existing delinquencies are being addressed, new ones are emerging at double the rate.
The Financial Supervisory Service noted that the current delinquency rate is lower than the 10-year average of 0.78% prior to the COVID-19 pandemic, indicating it is manageable in the medium to long term. However, simply citing historical averages does not guarantee future safety. It is crucial to monitor the deterioration of vulnerable sectors that may be obscured by the overall average and assess how much pressure banks can withstand if repayment burdens increase. The term 'manageable' should reflect the results of proactive measures, not serve as a false reassurance.
Banks must first accurately disclose their losses and build appropriate reserves. They should not postpone recognizing defaults by extending loan maturities or being overly optimistic about recovery prospects. A thorough reassessment of cash flows by industry and borrower is necessary, along with securing capital reserves that account for potential additional defaults. Reducing the book value of delinquent loans through sales does not equate to restoring borrowers' repayment capabilities. Maintaining financial health cannot be limited to managing quarterly figures.
However, banks should not collectively shut off lending. If funding is cut off to businesses facing temporary cash flow issues, even borrowers who could have managed may fall into default. Institutions with viable business prospects and repayment capabilities should be given time to recover through maturity adjustments and installment repayments. Conversely, for businesses with little chance of recovery, losses must be acknowledged, and restructuring should be pursued. Both indiscriminate collections and unconditional extensions can exacerbate defaults.
Financial authorities must also go beyond merely monitoring delinquency rates and reserves at individual banks. They should examine the debts of borrowers who have loans from multiple financial institutions and assess whether banks' lending reductions are pushing vulnerable borrowers into more expensive loans. Debt restructuring should focus on restoring repayment capabilities and include follow-up assessments of recovery post-support. The government cannot leave corporate restructuring and the revival of self-employed individuals solely in the hands of financial institutions.
The delinquency rate is already an indicator of unpaid debts. If responses are delayed until the figures worsen significantly, the costs of intervention will increase. What is needed now is not to inflate crisis rhetoric or downplay warnings by referencing past averages. Banks must build their capacity to absorb losses, and authorities must identify vulnerabilities early. Support must be directed to those who can be saved, and decisions on restructuring must not be delayed any longer.
* This article has been translated by AI.
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