[The Crisis in Secondary Financial Sector] ① Mutual Finance and Savings Banks Show 'Warning Signs' of Rising Delinquency Rates

Warning signs are flashing for delinquency rates in the secondary financial sector. Even credit cooperatives (Shinhyup), which are considered relatively stable within mutual finance, are showing delinquency rates in the high 3% range, while savings banks are showing rates in the 5% range. Amid talks of a 'September crisis,' financial authorities have begun managing the secondary financial sector through on-site inspections. This week, on-site inspections targeting central mutual finance associations are planned to review the delinquency rate management status and targets within the mutual finance sector.

Mutual Finance with Assets of 970 Trillion Won Shows Clear Upward Trend in Delinquency Rates

According to data on 'Total Loans and Delinquency Rate Trends in the Mutual Finance Sector' submitted to Kim Hee-gon, a member of the National Assembly's Political Affairs Committee from the People Power Party, by the Financial Supervisory Service on the 19th, the delinquency rate of Shinhyup as of the end of the first quarter rose by 1.28 percentage points from the previous quarter to 3.75%. This is the highest level among all mutual finance sectors.

Other mutual finance sectors show similar trends. The Korea Forest Cooperative's delinquency rate increased by 1.36 percentage points to 3.13%, the Fisheries Cooperative (Suhyup) rose by 1.06 percentage points to 3.06%, and the Agricultural Cooperative (Nonghyup) also increased by 0.75 percentage points to 1.93%, approaching the 2% range.

The overall delinquency rate of the mutual finance sector (Shinhyup, Nonghyup, Suhyup, Korea Forest Cooperative) has also been steadily rising. The delinquency rate, which was around 1.17% at the end of 2021, rose to 1.52% at the end of last year and reached 2.42% in the first quarter of this year. The amount of delinquent loans in the mutual finance sector also increased by 4.4 trillion won, from 7.6 trillion won at the end of last year to 12 trillion won at the end of March.

In particular, Saemaeul Geumgo, which had previously faced risks related to real estate project financing (PF), has not disclosed its first-quarter figures, but industry insiders believe the numbers have significantly worsened since the end of last year.

Delinquency Rates Also Flashing Red in Savings Banks and Capital Companies

The sharp rise in delinquency rates is not limited to mutual finance. The entire secondary financial sector, including savings banks and specialized credit finance companies (card and capital companies) with significant corporate finance operations, is struggling with expanding delinquency rates.

The savings bank sector is particularly under pressure. According to the Financial Supervisory Service, the delinquency rate of savings banks as of the end of the first quarter rose by 1.66 percentage points in just three months (one quarter) to 5.07%. This is not only higher than the approximately 3.7% rate at the end of 2019, just before the COVID-19 pandemic, but also the highest level since the end of 2016 (about 5.8%).

The situation in the specialized credit finance sector is also unfavorable. Capital companies saw their delinquency rate rise by 0.54 percentage points to 1.79%, and card companies increased by 0.33 percentage points to 1.53%. Both sectors have surpassed their pre-COVID-19 levels (capital 1.68%, card 1.43%). The total loan balance of savings banks and specialized credit finance companies is about 460.7 trillion won.

As a result, the performance of the secondary financial sector is also declining. According to the financial sector, the net loss of 79 domestic savings banks in the first quarter of this year reached 52.3 billion won, a decrease in net income of over 500 billion won compared to last year. The capital industry is experiencing a similar trend. The net profit of the top three capital companies (Hyundai, Hana, KB) in the first quarter of this year decreased by approximately 32% to 47% respectively.

Impact of Real Estate Secured Loans... Financial Authorities Also Conduct 'Inspections'

The reasons for the sharp rise in delinquency rates in the secondary financial sector include the deterioration of real estate markets leading to project financing (PF) loan defaults and a relatively high proportion of vulnerable borrowers. For example, savings banks and capital companies, which have focused on corporate finance, especially real estate PF, are struggling with rapidly increasing delinquency rates in that sector.

In the case of savings banks, the delinquency rate for corporate loans increased by 2.24 percentage points in the first quarter compared to the previous quarter, significantly outpacing the 0.85 percentage point increase in household loans. Capital companies also saw a 1.01 percentage point increase in corporate loan delinquency rates, surpassing increases in proprietary assets such as installment and lease loans (0.07 percentage points) and household loans (0.55 percentage points).

The worsening situation of vulnerable borrowers is also a concern. For instance, in card companies, the delinquency rate increase for card loans (0.56 percentage points) exceeded that for credit sales (0.21 percentage points). Card loans refer to long-term card loans (card loans), short-term card loans (cash services), revolving payment agreements, and installment payments, which are often used by low-income individuals as quick cash sources.

Professor Han Jae-jun of Inha University's Department of Global Finance said, "The impact of PF loans and the fact that borrowers are more vulnerable compared to other financial sectors are factors." A financial sector official added, "(The secondary financial sector) generally has borrowers with lower credit ratings than the primary financial sector and a higher proportion of high-risk assets in investments. Due to last year's inflation and the resulting rapid interest rate hikes, it is natural for delinquency rates in the secondary financial sector to worsen."

Of course, it is still difficult to conclude that the absolute level of delinquency rates in the secondary financial sector has reached a dangerous level. For example, although the delinquency rate in the savings bank sector has surpassed 5%, it is still far from the level seen during the savings bank crisis (2011-2012). Right after the savings bank crisis, in 2013, the delinquency rate in the savings bank sector was about 21.7%.

Financial strength has also improved. The BIS capital adequacy ratio of savings banks as of the end of the first quarter was 13.6%, exceeding the regulatory recommendation level of 11%, and the liquidity ratio was 241%, surpassing the legal minimum. These factors contribute to the authorities' view that the rapid rise in delinquency rates is unlikely to escalate into systemic risk.

However, financial authorities have begun preemptive management. Regarding real estate PF, which has emerged as the biggest risk this year, they have reactivated the creditor agreement and are responding accordingly. It is also reported that guidelines have been issued to sell off projects that are unmanageable at low prices.

Regarding delinquency rates, Lee Bok-hyun, head of the Financial Supervisory Service, recently announced at a 'Financial Situation Review Meeting' that on-site inspections will be conducted for a total of 27 companies, including savings banks, specialized credit finance companies, and mutual finance institutions, to encourage the cleanup of delinquent loans and management of delinquency rates. A financial authority official said, "We cannot say the situation is without problems, but it is not at a very bad level, so it is manageable. We plan to provide advice on delinquency rate management through on-site inspections and other measures."