FSS: 52.7% of Non-Performing Real Estate PF Loans to Be Resolved by June

Out of the Total 23.9 Trillion Won in Non-Performing PF Loans, 12.6 Trillion Won to Be Resolved
Non-Performing Assets to Continue Being Addressed in the Second Half of the Year
Concerns Over Non-Performing Real Estate PF Loans Expected to Decrease Significantly

The Financial Supervisory Service (FSS) announced that 52.7% of non-performing real estate project financing (PF) loans are expected to be resolved by next month. The agency plans to continue addressing non-performing assets in the second half of the year to further improve the soundness of PF loans.

The Deputy Director of the Financial Supervisory Service of Korea is speaking at a briefing on the "Progress and Performance of Real Estate PF Cleanup and Restructuring across All Financial Sectors" on the 22nd. Photo by Chae Seok Moon

On the 22nd, the FSS explained that, out of the 23.9 trillion won in domestic non-performing PF loans identified through a comprehensive investigation of all financial sectors last year, a total of 12.6 trillion won (52.7%) will be resolved or restructured by next month.

The domestic real estate PF market grew rapidly between 2020 and 2022, influenced by increased liquidity supplied during the recovery from COVID-19. However, from the second half of 2022, business viability significantly deteriorated due to a combination of rising interest rates, high inflation, unfavorable exchange rates, increased unsold inventory, rising costs, and declining sales rates.

Financial authorities encouraged voluntary restructuring based on the PF creditors' agreement, requiring coordination among creditors, project developers, and construction companies, as well as the sharing of losses. However, as non-performing assets expanded, they began implementing faster and more decisive restructuring measures from last year.

As of the business viability assessment at the end of last year, total non-performing PF loans (classified as either at-risk or non-performing) amounted to 23.9 trillion won. By March this year, 9.1 trillion won (38.1% of the total) had been either resolved (6.5 trillion won) or restructured (2.6 trillion won).

The FSS expects that, through enhanced monitoring of ongoing large- and mid-sized projects, the sale of normalization funds by financial sectors, and the use of platforms, a total of 12.6 trillion won will be resolved (9.2 trillion won) or restructured (3.4 trillion won) by the end of next month.

As a result, the FSS anticipates improvements in the soundness of PF loans, including a decrease in the ratio of substandard and below loans by 5.5 percentage points and a reduction in the delinquency rate by 4.1 percentage points.

The FSS also expects that, starting from the second half of the year, non-performing PF loans in most financial sectors will decrease to around 1 trillion won, bringing them within a manageable and stable range.

An FSS official emphasized, "The financial authorities will continue to proactively resolve and restructure non-performing assets to prevent further expansion, keeping in mind the possibility of additional non-performing loans arising from a delayed recovery in the real estate market."

The official added, "For individual financial companies where the resolution of non-performing assets is insufficient, we will strengthen soundness management through on-site inspections and require additional provisioning as needed."

The FSS stated that, during on-site inspections of more than ten institutions, including OK Savings Bank, it will examine the causes of PF non-performing loans in the credit extension process, as well as whether management or employees were involved in pursuing personal interests.

The agency stressed that, rather than promoting merger and acquisition (M&A) policies such as easing restrictions on business territories as requested by the industry, the priority should be on soundness management.

Han-gu, Deputy Director of the FSS, stated, "We will continue to manage non-performing PF loans and, if additional problematic assets are identified during on-site inspections, we will encourage provisioning, write-offs, and public or private sales. We also hope that financial companies will actively participate in efforts to manage soundness."