Delinquency Rate on SME Loans Hits 9-Year High, Raising Red Flags for Banks

[Financial News] Concerns about deterioration in banks’ corporate loan portfolios are growing, particularly among SMEs. With companies’ sales and cash flows yet to recover amid weak domestic demand, added financial costs have pushed the delinquency rate on SME loans at the five major banks to its highest level in more than nine years.
According to the financial industry on the 1st, the average delinquency rate on won-denominated loans (delinquent for at least one month) at KB Kookmin, Shinhan, Hana, Woori and Nonghyup Bank stood at 0.42% at the end of the third quarter this year. That was up 0.05 percentage points from the same period a year earlier and 0.03 percentage points from the previous quarter. It was the highest level since the first quarter of 2017 (0.45%).
Deterioration in corporate loans was most pronounced among SMEs. At the end of the third quarter, the delinquency rate on SME loans stood at 0.60%, the highest since the first quarter of 2017 (0.65%). After falling to 0.49% in the fourth quarter last year, the rate rose to 0.57% in the first quarter and 0.58% in the second quarter this year, and continued its upward trend.
The delinquency rate on corporate loans overall also reached 0.49%, its highest level since the second quarter of 2017 (0.58%). It was up 0.07 percentage points from the same period last year and 0.04 percentage points from the previous quarter. The delinquency rate among large companies rose to 0.18%, up 0.11 percentage points from 0.07% in the same period a year earlier. This was its highest level since the second quarter of 2021 (0.19%). Banks, however, view the rise in the large-company delinquency rate as a temporary effect of bad loans among some large borrowers, including those involving workouts and rehabilitation proceedings for JoongAng Group affiliates.
The effects of weak domestic demand and a sluggish real estate market were particularly evident across industries. The delinquency rate was highest in wholesale and retail at 0.71%, followed by construction (0.69%), accommodation and food services (0.55%), and real estate (0.51%). Repayment burdens appear to have grown in service industries where a delayed recovery in consumption and weak sales persist, as well as in industries facing a slowdown in real estate and construction.
The delinquency rate on household loans was 0.33%, unchanged from the previous quarter. After standing at 0.30% in both the third and fourth quarters last year, it rose to 0.32% in the first quarter this year and has remained at a similar level.
Banks expect the delinquency burden on SMEs to persist for the time being. Their analysis is that, with business conditions not improving amid weak domestic demand, financial costs such as loan interest are putting pressure on vulnerable companies’ ability to repay. SME delinquency rates have continued to rise as weak domestic demand and an economic slowdown combine with the burden of high interest rates. With the possibility of further rate hikes, forecasts suggest the upward trend could continue for the time being.

[email protected] Jung Sang-hee Reporter