South Korean Banks' Bad Debt Ratio Hits Record High Due to Corporate Restructuring

Strategic Insights -

South Korea's Financial Supervisory Service reported that local banks' non-performing loan ratio for small and medium enterprises (SMEs) reached a record high of 3.04% in the second quarter, up 0.85 percentage points from the previous quarter. This figure marks the highest level since September 2003, when the service began compiling related data. The increase in bad debt is attributed to industry-wide corporate overhauls, including creditor-led revamps of nonviable firms.

Key Takeaways:

  • The non-performing loan ratio for SMEs stood at 3.04% as of the end of June, up 0.85 percentage points from the previous quarter.
  • The figure marked the highest level since September 2003, when the Financial Supervisory Service began compiling related data.
  • Industry-wide corporate overhauls, including creditor-led revamps of nonviable firms, are responsible for the increase in bad debt.
  • Experts worry that banks' bad loans will likely increase in the second half as banks continue credit risk assessment on companies that owe more than 5 billion won to the financial sector.
  • The economic recovery helped the non-performing loan ratio dip to 1.8% in the fourth quarter of last year, but the corporate revamp has been jacking up the bad debt since the first quarter.
  • The bad debt ratio is expected to worsen as banks plan to continue credit risk assessment until October on companies that owe more than 5 billion won to the financial sector.

Statistics:

  • 3.04%: non-performing loan ratio for SMEs as of the end of June.
  • 0.85 percentage points: increase in non-performing loan ratio for SMEs from the previous quarter.
  • September 2003: date when the Financial Supervisory Service began compiling related data.
  • 65: number of nonviable firms included in the list unveiled by local banks in late June.
  • 16: number of builders among the 65 nonviable firms.
  • 2.49%: non-performing loan ratio for SMEs in the second quarter of 2009.
  • 1.8%: non-performing loan ratio for SMEs in the fourth quarter of last year.
  • 5 billion won (US$4.2 million): amount companies must owe to the financial sector for credit risk assessment.

Sources:

  • (Yonhap)
  • Financial Supervisory Service
  • Asia Pulse