South Korean banks' loan delinquency rate climbed to its highest level in nine years and 10 months, as expectations grow that the Bank of Korea's Monetary Policy Board could resume interest rate increases as early as next month.
The Financial Supervisory Service said on the 23rd that the won-denominated loan delinquency rate at domestic banks — covering principal and interest overdue by one month or more — stood at 0.69% at the end of August, up 0.06 percentage points from the previous month. That was the highest reading since October 2016, when the rate was 0.81%, and 0.08 percentage points higher than a year earlier.
The delinquency rate on all corporate loans rose 0.08 percentage points from a month earlier to 0.86%. The rate on loans to large companies climbed 0.03 percentage points to 0.39%, setting a record high for a second straight month after July. Analysts attribute the increase to the continued effect of bad debt added in July, when affiliates of Joongang Group filed for workout and rehabilitation proceedings.
The delinquency rate on loans to small and medium-sized enterprises overall rose 0.09 percentage points from the previous month to 1.00%. Within that, the rate for SME corporate borrowers, excluding self-employed owners, increased 0.10 percentage points to 1.10%, while the rate for self-employed business owners rose 0.09 percentage points to 0.86%. Prolonged high interest rates have left repayment burdens building up among smaller companies and small business owners.
The household loan delinquency rate rose 0.03 percentage points from a month earlier to 0.45%. The rate on mortgage loans climbed 0.02 percentage points to 0.31%, while the rate on household loans excluding mortgages rose 0.07 percentage points to 0.91%.
Newly delinquent loans totaled 3 trillion won ($2.1 billion), down 200 billion won from the previous month, while the amount of delinquent debt cleared rose 100 billion won to 1.5 trillion won. The new delinquency rate was 0.12%, unchanged from a month earlier.
The FSS described the level as manageable, noting it remains below the 0.78% long-term average for the decade before the COVID-19 pandemic, from 2010 to 2019. Still, delinquencies are expected to rise, particularly among vulnerable borrowers, as market interest rates continue to climb even after the central bank held its policy rate at 3.00% a day earlier.
An FSS official said the regulator will check whether rules are being followed so that debtors' rights are not infringed during the sale and collection of delinquent loans, and will actively pursue debt restructuring for vulnerable borrowers.