South Korean savings banks have lowered their delinquency rates by selling soured real estate project financing loans to restructuring funds, but critics say the risk remains because the underlying development sites are taking far longer to clear. With the property market still weak, the practice has drawn accusations of "parking" — tying up bad assets for long periods instead of actually resolving them.
The savings bank industry's delinquency rate fell to 6.04% at the end of last year from 8.52% at the end of 2024, a drop of 2.48 percentage points, according to financial industry sources on the 16th. It edged up to 6.26% at the end of June this year but remains well below the 2024 level. Analysts attribute the improvement in asset quality indicators largely to delinquent loans being removed from the books as they were sold to restructuring funds.
Total project financing exposure, including PF loans and land-collateral loans, has also shrunk sharply. Savings bank PF exposure fell 62.4% to 8.3 trillion won ($5.8 billion) at the end of June this year from 22.1 trillion won at the end of 2023.
The bad loans transferred to the funds, however, are taking considerable time to work out. Investors willing to take over stalled projects are scarce in the current property downturn, and untangling the competing legal claims attached to failed development sites is also difficult. An industry official said expectations for project returns remain low because of the weak real estate market. "A restructuring fund is a process of making a failed site an attractive investment again, so there is no way to know how long a sale will take," the official said.
An official at the Financial Services Commission said distressed assets often carry complicated layers of legal claims accumulated as they deteriorated, and those have to be resolved alongside the sale process, which takes a long time.
The deeper problem is that savings banks can continue to bear the related loss risk even after handing the loans to a fund. When a bank sells loans to a fund and then invests back into that same fund, the exposure simply changes form — from a loan into beneficiary certificates — and part of the loss risk stays with the bank. Savings banks that take subordinated stakes are especially exposed, because they can absorb losses ahead of senior investors if the fund suffers a shortfall.
"PF loans are being sold to funds alongside reinvestment in those funds, and the beneficiary certificates acquired through that reinvestment are often ranked below the original PF loans in repayment priority, raising the risk of additional losses during asset recovery," said Ahn Soo-jin, a senior research fellow at NICE Investors Service. Beneficiary certificates held by the savings bank industry have more than doubled, rising to 7.8 trillion won at the end of June this year from 3.7 trillion won at the end of 2023.
Concerns about deferred losses surfaced as soon as the funds were created. All 27 savings banks that sold PF sites to the second fund in 2024 also invested in that fund, according to the office of Rep. Park Sang-hyuk of the Democratic Party of Korea. Each bank's share of the fund's total commitments largely matched its share of total loan sales, prompting criticism that the transactions amounted to self-dealing. The industry later revised the structure, bringing in outside investors as senior participants from the third fund onward while the selling banks took subordinated stakes jointly, in an effort to blunt questions about whether the sales were genuine.
The possibility that savings banks might buy back the loans once the property market recovers cannot be ruled out entirely. Direct repurchases are effectively blocked for now, but the industry has a long history of carrying out such deals through related parties or proxies. The Financial Supervisory Service says no fund has resold PF loans back to an originating savings bank so far. "If such a case arose, it would be a matter for regulatory guidance," an FSS official said.
Experts warn that the longer the cleanup drags on, the heavier the losses for financial firms — and the greater the risk to housing supply. "If the cleanup is delayed, capital stays tied up and financing and management costs accumulate, which can enlarge the final loss, and if residential sites are delayed in starting or resuming construction, it can affect future housing supply schedules," said Seo Ji-yong, a professor of business administration at Sangmyung University. "We need to examine whether projects actually resume and how long the delays last."
