SEOUL, March 26 (AJP) - A growing pool of overleveraged, subprime borrowers is emerging as a key financial risk in South Korea, with war-driven surge in market and dollar rates amplifying repayment stress.
Data released Thursday by the Bank of Korea (BOK) showed the share of “subprime borrowers” — defined by the BOK as individuals with loans from three or more financial institutions, belonging to the bottom 30 percent income bracket and holding low credit ratings who would bear much higher borrowing terms — rose to 6.7 percent at end-2025, up from 6.4 percent in the previous quarter.
The ratio had hovered near 7 percent earlier in the year before easing temporarily on the back of the government’s “bad bank” debt relief program, which targeted long-term small-scale delinquencies. The improvement, however, proved short-lived, reversing within a quarter.
More concerning is the steady buildup of borrowers at risk of slipping into that category. The share of “potentially vulnerable borrowers” climbed from 17.5 percent at the start of 2025 to 18.0 percent by the fourth quarter, signaling a widening pipeline of credit-strained households.
With debt spread across multiple institutions, repayment risks are compounding. Such borrowers face heightened exposure to “Ponzi-like” rollover behavior, making them particularly vulnerable to default if income fails to keep pace with rising interest costs. The BOK defines this group broadly as either middle-income borrowers with multiple loans or low-income borrowers with debt from at least two institutions.
Corporate indicators point to a parallel strain, underscoring a deepening K-shaped divergence. The share of “zombie” small and medium-sized enterprises (SMEs) — firms with an interest coverage ratio (ICR) below 1.0 — jumped to 61.4 percent in the third quarter, up from 56.9 percent in the second quarter. The figure is nearly double that of large conglomerates, at 32.6 percent.
SMEs’ average ICR stood at minus 0.4, indicating operating profits are insufficient to cover even interest payments, while large firms improved to 4.7, widening the corporate gap.
The outlook is darkening further as external shocks intensify. The Korean won has weakened past the 1,500-per-dollar level — a threshold last seen during the global financial crisis — amid disruptions tied to the effective closure of the Strait of Hormuz. Korea’s heavy reliance on Middle Eastern energy has amplified the impact.
Market rates, a key gauge of borrower stress, have also surged. As of Wednesday, the three-year government bond yield stood at 3.558 percent, up 21 percent year-to-date, while the 10-year yield climbed to 3.859 percent, more than 100 basis points above the 2.5 percent policy rate.
“If holding rates steady has not eased principal and interest burdens, it suggests income weakness across households and firms has not been fully reflected,” said Jang Jeong-su, deputy governor general for financial stability and payments.
“As market rates rose, delinquency rates followed, increasing the number of vulnerable borrowers and firms,” added Kim Jeong-ho, head of the BOK’s stability analysis team.
Officials also flagged the policy dilemma facing incoming BOK Governor nominee Shin Hyun-song.
“While a rate hike could support financial stability, it would also increase the burden on vulnerable borrowers and firms,” Jang said, noting the central bank will closely monitor both domestic conditions and external risks, including developments around the Strait of Hormuz.
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