BOK: Number of SMEs with Delinquent Loans Increases 2.6-Fold in 10 Years; Risk Management Needed for SMEs and Service Sector

The Bank of Korea (BOK) has assessed that risk management is necessary as non-performing loans (NPLs) are rapidly increasing, particularly among small and medium-sized enterprises (SMEs) and the service sector, amid recent rises in market interest rates and exchange rates.

According to the Financial Stability Report released by the BOK on Wednesday (June 24), the volume of substandard-or-below loans (loans delinquent for three months or longer) at domestic banks has steadily increased since reaching 9.7 trillion won at the end of September 2022, standing at 17.7 trillion won as of the end of March this year.

Unlike in 2015–2016, when bad loans surged primarily among large shipbuilding and shipping conglomerates, recent non-performing loans at domestic banks are increasing mainly among SMEs and the service sector.

Looking at the breakdown of bad loan borrowers as of the end of March this year, the share of loans to SMEs stood at 58.9%, a significant increase compared to 32.2% at the end of March 2016, when the volume of bad loans previously peaked.

Conversely, the share of loans to large conglomerates decreased from 60.4% to 20.5% over the same period.

By industry, while the shipbuilding and shipping sector accounted for a high share (35.0%) in 2016, the service sector held the largest share (52.0%) as of the end of March this year.

The number of SME borrowers falling behind on loan repayments has also increased significantly.

The number of SME borrowers with loans delinquent for one month or longer increased approximately 2.6-fold, from 22,339 at the end of March 2016 to 58,372 at the end of March this year.

Over the same period, the number of delinquent large conglomerate borrowers decreased from 118 to 68.

The BOK explained, "While bad loans increased mainly among large conglomerates in 2015–2016 due to the deteriorating debt-repayment capabilities of vulnerable sectors like shipbuilding and shipping, defaults are recently occurring primarily in loans to SMEs."

It added, "Due to the delayed recovery in service sectors such as wholesale and retail, and real estate, bad loans are occurring across various industries, and the number of affected companies has also grown significantly."

As non-performing loans to SMEs rise, the way domestic banks write off or dispose of bad debt has also changed compared to the past.

In the past, when large corporate defaults were prevalent, creditor-led corporate normalization efforts meant that debt restructuring, loan recovery, and write-offs accounted for a large portion of debt disposal. Recently, however, banks are increasingly selling off non-performing loans (NPLs) to specialized investment firms.

Last year, the volume of bad loan sales by domestic banks reached 8.2 trillion won, a sharp increase from 4.7 trillion won in 2016.

In contrast, debt restructuring (from 2.8 trillion won to 100 billion won), loan recovery (from 8.2 trillion won to 4.5 trillion won), and write-offs (from 9.8 trillion won to 6 trillion won) all decreased over the same period.

Looking at the composition of recently sold NPLs, the share of individual borrowers, including self-employed business owners, expanded significantly to 41.5%, up from 22.8% in 2015.

The BOK explained that this was due to factors such as sluggish domestic demand and rising loan interest rates.

The share of NPL sales for corporate borrowers decreased from 77.2% to 58.5%.

The BOK explained, "The banking sector appears to have judged that selling off bad debt is more advantageous than time-consuming loan recovery and debt restructuring when dealing with non-performing loans, which have recently been rising rapidly across multiple industries."

The BOK pointed out, "As market interest rates rise in the future, bad loans are highly likely to increase, centered on borrowers whose business conditions remain weak and whose recovery of repayment capabilities is delayed." It added, "To prepare for the possibility that banks may face difficulties in smoothly disposing of bad loans due to a potential decline in demand from specialized NPL investment firms, the banking sector must diversify its methods of resolving bad debt and focus on preemptive risk management."

(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.