South Korean bank loan delinquencies climbed to a two-year high in February and may continue rising as slower economic growth and higher interest rates pressure borrowers, according to analysts.
Delinquencies on won-denominated loans reached 0.36% in February, the highest since 0.38% in August 2020, South Korea's Financial Supervisory Service (FSS) said April 25. Delinquencies on small and medium-sized enterprise loans rose to 0.47% from 0.39% the previous month and 0.44% two years prior, while delinquencies on household loans reached 0.32%, versus 0.28% the month before and 0.22% in February 2021.
The agency considers loans delinquent if interest or principal payments are overdue by at least one month.
"Economic conditions have not fully recovered to pre-pandemic levels, while higher interest rates are taking hold in this inflationary environment. That is adding to the difficulty of vulnerable borrowers meeting debt payment needs," said Oh Tae-rog, a Korea Institute of Finance research fellow. "It also highlights the need for a policy shift from a financial relief approach to deleveraging programs targeting small businesses and other vulnerable groups."
Higher rates
The Bank of Korea (BOK) held its policy rate at 3.50% this month but warned uncertainties are high, with increasing risks to the financial sector in major countries.
The central bank has lifted rates 10 times since August 2021. At its last meeting, the BOK noted inflation would likely stay above target for "a considerable time" as economic expansion slows, hurt partly by lackluster technology exports. The International Monetary Fund cut South Korea's growth forecasts to 1.5% from 1.7% for 2023 and to 2.4% from 2.6% for 2024.
Delinquencies, though still below pre-pandemic levels, are accelerating at a worrying rate, said Kim Do-ha, a Hanwha Investment & Securities Co. Ltd. analyst. The delinquency rate on unsecured household loans jumped to 0.64% in February from 0.55% the month before and 0.41% a year earlier, according to the FSS. Meanwhile, large company loan delinquencies held at 0.09%.
"The proportion of loans to small business operators falling behind on payments is rising too fast, while the credit quality of household loans is worsening as well," said Kim. "This could translate into a negative impact on banks' credit metrics in the near term."
