SME loan delinquency rate hits 9.5-year high as weak domestic demand, interest burden pile up

The delinquency rate on loans to small and medium-sized enterprises has climbed to its highest level in nine and a half years, as weak domestic demand has left sales and cash flows stagnant while interest costs continue to mount. Sectors sensitive to the economic slowdown — including wholesale and retail trade, construction, and accommodation and food services — have seen the heaviest strain. The broader corporate loan delinquency rate has also risen, deepening concerns about credit deterioration as interest rates climb.

The average SME loan delinquency rate at KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank stood at 0.60% at the end of the third quarter this year, according to financial industry data released Sunday. That is the highest since the first quarter of 2017, when the rate was 0.65%. After easing from 0.54% at the end of last year's third quarter to 0.49% in the fourth quarter, the rate climbed back to 0.57% in the first quarter this year and 0.58% in the second quarter. The delinquency rate is calculated based on loans overdue by one month or more.

Analysts say the deterioration reflects weakening repayment capacity at vulnerable firms, as financial costs including loan interest continue to weigh on businesses whose sales and cash flows have not sufficiently recovered. A prolonged slump in domestic demand and economic growth could further slow any sales rebound and reduce the cash available to service debt.

The average won-denominated loan delinquency rate across the five major banks was 0.42% at the end of the third quarter — up 0.05 percentage points from the same period last year (0.37%) and 0.03 percentage points from the previous quarter (0.39%). That is also the highest since the first quarter of 2017, when the rate reached 0.45%.

The corporate loan delinquency rate reached 0.49%, the highest since the second quarter of 2017 (0.58%), rising 0.07 percentage points from 0.42% a year earlier and 0.04 percentage points from 0.45% in the previous quarter. Corporate loan delinquency rates were similarly elevated in early 2017, when restructuring in the shipbuilding and shipping industries coincided with an economic slowdown.

The large-enterprise delinquency rate also rose to 0.18% at the end of the third quarter, the highest since the second quarter of 2021 (0.19%), up 0.11 percentage points from 0.07% a year earlier and 0.10 percentage points from 0.08% the previous quarter. Banks say the increase largely reflects one-off factors, including the workout and rehabilitation proceedings initiated for some affiliates of Joongang Group, which pushed up the volume of soured large-ticket loans.

By sector, wholesale and retail trade posted the highest delinquency rate at 0.71%, followed by construction (0.69%), accommodation and food services (0.55%), real estate (0.51%), scientific and technology services (0.49%) and manufacturing (0.36%). The strain was most pronounced in wholesale and retail trade and accommodation and food services — sectors hit by delayed consumer recovery and sluggish sales — as well as in real estate and construction, where the downturn has persisted.

The household loan delinquency rate held steady at 0.33% at the end of the third quarter, unchanged from the previous quarter. It has been on a gradual upward trend, rising from 0.30% at the end of the third and fourth quarters last year to 0.32% in the first quarter this year.

"The SME delinquency rate has kept rising as weak domestic demand and the economic downturn have been compounded by the high interest rate burden stemming from benchmark interest rate hikes," a commercial bank official said. "With further rate increases expected, the upward trend is likely to continue for now."