[Financial Stability Status] Warning of Rising Default Risk in Savings Banks' Real Estate Loans... PF Loans Reach Highest Level in 10 Years

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] In the second quarter, the loan growth rate of savings banks recorded 27.1%, significantly surpassing the loan growth rates of banks and non-bank financial institutions. As housing prices have continued to rise since 2019, real estate PF loans reached their highest level in 10 years.

According to the "Financial Stability Report as of September 2021" released by the Bank of Korea on the 24th, the loan growth rate of savings banks in the second quarter increased by 27.1% compared to the same period last year, significantly exceeding the loan growth rates of banks (9.0%) and non-bank financial institutions (14.0%).

Household credit loans recorded 44.4%, and loans to small and medium-sized corporations were 26.8%. Loans to individual business owners also turned to an increasing trend at 20.1% since the second half of last year.

The Bank of Korea analyzed that savings bank loans surged due to increased investment demand linked to real estate development amid the continued rise in housing prices since 2019, along with increased demand for livelihood funds due to the impact of COVID-19.

In particular, as the real estate market continued to boom nationwide, loans related to the real estate industry, such as PF loans, rapidly increased. As of the end of June this year, the outstanding balance of PF loans at savings banks was 7.8 trillion won, marking the highest level since September 2011 (8.8 trillion won).

Corporate loans in industries sensitive to the economy, which were relatively severely affected by COVID-19, increased rapidly, and household credit loans for low-income groups also rose sharply. The growth rate of household credit loans for the bottom 30% income group expanded significantly from 8.8% at the end of 2019 to 22.8% at the end of 2020, and recorded 24.7% in the first quarter of this year.

It was analyzed that strengthened loan regulations in the banking sector and the government's policy to encourage mid-interest rate loans contributed to the increase in household credit loans at savings banks. This is seen as a shift of some bank loan demand to savings banks, which have relatively lower regulatory levels. Looking at the Debt Service Ratio (DSR), banks average 40%, whereas savings banks average 90%.

Furthermore, it was confirmed that savings banks, especially large ones, have significantly strengthened their loan business base by expanding non-face-to-face sales channels. In fact, 24.5% of newly originated household credit loans at savings banks in the second quarter of this year were executed through mobile loan platforms.

The Bank of Korea pointed out that although the credit quality of savings banks' loans is currently sound, caution is needed as loan defaults could rapidly progress depending on changes in the economic situation.

It also analyzed that the recent surge in real estate PF loans could increase the risk of defaults depending on the real estate market conditions.

The Bank of Korea emphasized, "It is necessary to closely monitor the potential deterioration of debt repayment ability of savings bank borrowers due to changes in the financial easing stance and government policies," adding, "If concerns about savings bank insolvency increase, there is a latent risk of large deposit withdrawals not covered by deposit insurance and a sharp contraction in credit supply."