Korean Banks Face Rising Delinquencies as Government Pushes More Corporate Lending

Banks are growing increasingly concerned about asset quality as government efforts to curb household lending and expand so-called productive finance push more credit toward companies. With the economy slowing, a rapid expansion of lending to weaker firms could become a threat to banks’ balance sheets, the industry says.

According to the financial sector on the 28th, the average overall delinquency rate for the four major banks — KB Kookmin, Shinhan, Hana and Woori — rose to 0.36% in the first quarter, covering both household and corporate loans. That was up 0.06 percentage points from 0.30% at the end of last year. The delinquency rate refers to the share of loans with both principal and interest overdue by more than one month.

Delinquencies at regional banks, which have a higher share of lending to local small and midsize businesses, have crossed the 1% level seen as a psychological threshold. As of the fourth quarter of last year, the average delinquency rate at four regional bank affiliates under BNK Financial Group and JB Financial Group was 1.07%, up 0.29 percentage points from 0.78% a year earlier. With regional downturns persisting, analysts said the upward trend could continue this year.

The challenge, bankers say, is that delinquencies are rising just as policy-driven expansion of productive finance makes loan growth hard to avoid. As corporate lending increases quickly and delinquencies climb, banks face pressure to expand credit while also tightening risk management. Unlike collateral-heavy household loans, corporate loans are more exposed to spillover defaults when the economy weakens.

The industry also points to growing numbers of higher-risk borrowers as downside pressure on the economy has increased since the Middle East war, signaling weaker capacity for companies to repay debt on time.

In the Bank of Korea’s survey on financial institutions’ lending attitudes, the corporate credit risk index for the second quarter rose from the previous quarter to 25 for large companies and 36 for small and midsize firms. The index measures the risk of delinquency or default, with higher figures indicating greater risk. If rising credit risk leads to more troubled borrowers and keeps delinquencies climbing, banks’ asset-quality burden could intensify.

Warning signs are already showing in key indicators. The four major banks’ average nonperforming loan coverage ratio fell to 153.8% in the first quarter from 172% at the end of last year, down 18.2 percentage points. The ratio compares loan-loss reserves with substandard loans that are more than three months overdue and is a major gauge of banks’ ability to absorb losses. A lower ratio indicates weaker loss-absorbing capacity. The balance of nonperforming loans rose about 12% from the end of last year to 5.0773 trillion won.

Banks also warn that aggressive corporate lending could hurt profitability. Policy projects require interest rates to be set below certain levels, and commercial banks with relatively higher funding costs can see margins shrink. In some large projects, loan rates have been set about 0.5 to 6 percentage points below the market average, making negative margins unavoidable once funding costs are considered, according to the industry. Banks also cited added burdens from expanding inclusive finance for vulnerable groups and support tied to prolonged Middle East-related risks.

A financial industry official said expanding productive finance is necessary, but warned that running it at a fast pace with a focus on performance could bring side effects such as bad loans. The official added that banks face a difficult task of meeting government policy direction and social expectations while also raising shareholder returns under value-up initiatives.