Banks Lowering Household Loan Thresholds While Raising Corporate Loan Barriers

Household Loan Margins Lowered Under Regulatory Pressure
Tougher Standards for SME Loans with High Delinquency Rates
"Delinquency Rate Rise Expected to Continue Through First Half of the Year"

While banks are lowering household loan interest rates in response to pressure from authorities, they are raising the lending standards for corporate loans. In particular, small and medium-sized enterprises (SMEs) with high default risks are the main targets in corporate lending, which is attributed to a sharp increase in SME delinquency rates. With the exchange rate soaring, banks have no choice but to reduce high-risk SME loans in order to secure dividend capacity.

According to the financial sector on the 3rd, major commercial banks have started to lower the previously high additional interest rates on household loan products to manage the total volume of household loans. First, Woori Bank lowered the additional interest rates on household loan products by up to 0.29 percentage points starting from the 31st of last month. Apartment mortgage loans (based on the COFIX benchmark rate) were reduced by 0.20 percentage points, jeonse deposit loans by 0.01 to 0.29 percentage points, and unsecured loans by 0.23 percentage points. Earlier, Shinhan Bank also lowered additional interest rates on household loans by 0.05 to 0.3 percentage points. The additional interest rates on mortgage loans for home purchase and living stabilization funds (5-year financial bonds) were reduced by 0.1 and 0.05 percentage points, respectively. KB Kookmin Bank cut household loan interest rates (5-year bank bonds) by 0.04 percentage points, and Industrial Bank of Korea also lowered loan additional interest rates by 0.2 to 0.3 percentage points.

The reduction in household loan interest rates by commercial banks is seen as a response to the authorities’ criticism of the widening gap between deposit and loan interest rates. Financial Services Commission Chairman Kim Byung-hwan pointed out, "Despite two cuts in the base rate last year, the reductions were not sufficiently reflected in loan interest rates."

On the other hand, for corporate loans, banks plan to expand lending mainly to creditworthy large corporations while selectively lending to SMEs. This is attributed to the significant increase in SME loan delinquency rates. According to the Financial Supervisory Service, as of the end of November 2024, the delinquency rate for won-denominated corporate loans was 0.60%, up 0.04 percentage points from the previous month. Compared to the same month last year, it increased by 0.08 percentage points. Among these, the delinquency rate for large corporations was 0.03%, down 0.01 percentage points from the previous month, but the SME loan delinquency rate rose by 0.05 percentage points to 0.75% during the same period. Notably, the SME loan delinquency rate increased by 0.14 percentage points compared to the same month last year (0.61%). Compared to two years ago, at the end of November 2022 (0.34%), it more than doubled. Kim In, a researcher at BNK Investment & Securities, analyzed, "Banks are reducing SME loan operations to manage capital ratios."

Although banks are raising lending standards for SMEs to manage capital ratios, the delinquency rate is expected to continue rising through the first half of this year. The delinquency rate is soaring amid a high exchange rate, and even if the exchange rate stabilizes, it is difficult to expect an improvement in business conditions due to a domestic economic downturn. According to the Bank of Korea, the Business Survey Index (BSI) for small and medium-sized manufacturing corporations fell from 65 in the first quarter of last year to 56 in the fourth quarter, significantly below the 2014?2023 average of 69. Kim Do-ha, a researcher at Hanwha Investment & Securities, analyzed, "The rise in delinquency rates is expected to continue until the first half of 2025."

A representative from a commercial bank said, "Due to the financial authorities’ household debt management policy, it is difficult to significantly increase household loans this year, so the focus is on corporate loans, but even corporate loans are being made selectively," adding, "To secure dividend capacity, loans to companies with high default risks must be reduced."