Bank delinquency rate hits 10-year high as burden grows on small firms, self-employed

The delinquency rate on won-denominated loans at domestic banks climbed to 0.69 percent in August, the highest level since October 2016. The corporate loan delinquency rate rose to 0.86 percent, with the upward trend concentrated in loans to small and medium-sized corporations and sole proprietors.

According to the Financial Supervisory Service, the won-loan delinquency rate at domestic banks stood at 0.69 percent at the end of August, up 0.06 percentage points from 0.63 percent at the end of the previous month. It was also 0.08 percentage points above the 0.61 percent recorded in the same month last year. The figure marks the highest level since October 2016, when the rate was 0.81 percent.

The rise was particularly pronounced in corporate lending. The corporate loan delinquency rate reached 0.86 percent, up 0.08 percentage points from a month earlier and 0.13 percentage points above the same period last year.

Breaking down the figures, the delinquency rate on loans to small and medium-sized enterprises rose 0.09 percentage points from the previous month to 1.00 percent. Within that category, small and medium-sized corporations saw their rate climb 0.10 percentage points to 1.10 percent, while sole proprietor loans rose 0.09 percentage points to 0.86 percent. The delinquency rate on large corporate loans also edged up 0.03 percentage points to 0.39 percent, a gain of 0.24 percentage points compared with the same month last year, when it stood at 0.15 percent.

The household loan delinquency rate rose 0.03 percentage points from the previous month to 0.45 percent, though it was unchanged from the same month last year. The mortgage delinquency rate increased 0.02 percentage points to 0.31 percent, while the rate on unsecured loans and other credit excluding mortgages rose 0.07 percentage points to 0.91 percent.

The weakening repayment capacity of vulnerable borrowers — including small businesses and the self-employed — amid deteriorating economic conditions is seen as the main driver of the rising delinquency rate. However, the rate at which borrowers are newly falling into delinquency has not surged sharply.

The new delinquency rate in August held at 0.12 percent, unchanged from both the previous month and the same month last year. The volume of newly delinquent loans totaled 3 trillion won ($2.26 billion), down 200 billion won from the previous month. Meanwhile, the amount of delinquent loans resolved came to only 1.5 trillion won — roughly half the new delinquency volume — leaving the total stock of delinquent loans 1.5 trillion won higher over the month.

The FSS said it does not view the current delinquency rate as a level that warrants excessive alarm. "The current delinquency rate remains below the 10-year pre-COVID-19 long-term average of 0.78 percent, placing it within a manageable range over the medium to long term," an FSS official said. "However, the continued upward trend in delinquencies — against a backdrop of domestic and external economic uncertainty and rising market interest rates — is itself a concern, and we are closely monitoring vulnerable segments, particularly small and medium-sized corporations and sole proprietors."

The FSS said it plans to encourage banks to proactively strengthen their loss-absorption capacity and to actively pursue the sale and write-off of non-performing loans. For vulnerable borrowers with limited repayment capacity, the regulator intends to facilitate debt restructuring to ease their repayment burden.

Meanwhile, the FSS distributed advisories and security patches to the entire financial sector through its Financial Industry Integrated Security Response System, known as FIRST, in response to a recently identified PHP security vulnerability. Financial institutions were asked to review their use of vulnerable PHP versions, assess the potential impact, confirm whether patches have been applied, and report their remediation schedules. The FSS said it also plans to conduct a comprehensive inspection of its own.