Corporate Loans Surge by 21 Trillion Won This Year, Testing Bank Stability

As of April this year, the outstanding balance of corporate loans at South Korea's five major banks has increased by over 21 trillion won, nearing last year's total annual increase. This surge is attributed to the government's tightening of household loan regulations and a push for productive finance, prompting banks to significantly increase their corporate loan portfolios. However, the simultaneous rise in both loan balances and delinquency rates amid fierce competition in corporate finance has raised concerns about the urgent need for a balance between growth and risk management.

According to the financial sector, as of the end of April, the outstanding balance of corporate loans at KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup banks reached 866.646 trillion won, an increase of 21.3392 trillion won compared to the end of last year. Following a rise of 5.4449 trillion won in March, this marks the second consecutive month of increases exceeding 5 trillion won, bringing the total increase within just four months close to last year's annual figure of 24.1029 trillion won. As of May 11, the corporate loan balance continued to rise, reaching 867.1478 trillion won.

In contrast, the outstanding balance of household loans at these five banks decreased by 3.821 billion won to 767.296 trillion won as of the end of last month, reflecting a contraction. This decline is interpreted as a result of reduced loan demand following the government's management policies and rising interest rates after the Middle East conflict.

The competition among banks to attract corporate loans has intensified, leading to a reversal where corporate loan interest rates are now lower than those for household loans. Typically, corporate loans carry higher interest rates due to the greater risk of default. However, since the government emphasized 'productive finance' at the end of last year, the trend has shifted, with corporate loan rates falling below household loan rates.

According to the Bank of Korea, the average interest rate for corporate loans at domestic deposit banks was 4.14% in March, down from 4.2% in February. In contrast, the interest rate for household loans rose to 4.51%, an increase of 0.06 percentage points from the previous month.

Industry analysts predict that the reversal of household and corporate loan rates is likely to persist for the time being, as banks solidify their focus on expanding corporate loans in line with the government's clear policy direction.

However, there are concerns that aggressive expansion of corporate loans may increase the burden of stability management for banks. The simultaneous rise in loan volumes and delinquency rates suggests that the expansion could lead to an increase in non-performing assets for banks.

In fact, the average delinquency rate for corporate loans at the five major banks rose to 0.46% at the end of the first quarter, a 2.5-fold increase from 0.19% at the end of 2021. The delinquency rate for the Industrial Bank of Korea, which has a significant proportion of corporate clients, jumped from 0.28% to 0.98% during this period. Notably, the delinquency rate for small businesses is rising even faster, averaging 0.57% at the five major banks and 1.42% at regional banks. This trend is attributed to weakened debt repayment capabilities among companies amid sluggish domestic demand and geopolitical risks stemming from the Middle East.

A financial sector official stated, "Banks with a high proportion of small business loans may face increased difficulties in loan management if the economic situation worsens. Given that corporate loans generally have higher delinquency rates and larger volumes compared to household loans, managing loan quality will become a new challenge for the banking sector."