Banks to tighten credit loans further in Q4, survey shows

Banks are expected to tighten lending conditions further in the fourth quarter, particularly for household credit loans and corporate loans, as credit risks grow among small and medium-sized enterprises and financially vulnerable households.

According to the Bank of Korea's lending behavior survey released Monday, the composite lending attitude index for banks in the fourth quarter is forecast at -11. The index stood at -1 in the first quarter and -2 in the second quarter before dropping sharply to -20 in the third quarter.

A negative reading indicates tighter lending standards, lower credit risk or weaker loan demand compared with the previous quarter, while a positive reading signals the opposite.

By borrower type, the index for household housing-related loans is forecast at 0, meaning banks will maintain roughly the same stance as the previous quarter. The index for household general loans — which include credit loans — came in at -8, indicating a tightening bias.

The Bank of Korea said the government's easing of aggregate household loan regulations in August freed up lending capacity at banks, allowing the housing loan stance to hold steady quarter-on-quarter, but the tightening trend for general loans is still expected to continue.

Both large corporations (-8) and small and medium-sized enterprises (-19) face tighter lending conditions amid heightened external uncertainty and a recent deterioration in loan quality.

The composite loan demand index fell to 6 in the fourth quarter from 13 in the third quarter.

Among household loan demand, housing-related loans (14) are expected to rise steadily, while general loans (3) are forecast to increase slightly.

Corporate loan demand is expected to grow among large companies (3), driven by liquidity needs as a hedge against external uncertainty and rising corporate bond rates. Demand from small and medium-sized enterprises (0) is expected to remain flat quarter-on-quarter.

The composite credit risk index banks projected for the fourth quarter rose to 29 from 26 in the third quarter.

Among corporations, credit risk is expected to grow mainly at small and medium-sized enterprises (31) rather than large companies (6). For households (28), the increase reflects concerns over the declining debt-repayment capacity of financially vulnerable borrowers.

Non-bank financial institutions, including savings banks, are broadly expected to maintain their tightening lending stance and keep credit risk elevated.

The survey was conducted from Sept. 2 to Sept. 16 and covered 203 chief lending officers at financial institutions, using electronic questionnaires, mail and interviews.