Financial Services Commission Holds 'Real Estate PF Situation Review Meeting'
Real Estate PF Exposure at 177.9 Trillion Won, Down 8.7 Trillion Won from Previous Quarter
Loans at Risk of Default Decrease for Second Consecutive Quarter to 18.2 Trillio
The scale of non-performing real estate project financing (PF) in South Korea is shrinking, and delinquency rates are also declining, indicating an overall improvement in the situation. The government has decided to gradually implement the "PF System Improvement Plan," which includes raising the equity ratio requirement for PF projects, starting in 2027.
Non-Performing Loans of Concern Drop to 18.2 Trillion Won for Second Consecutive Quarter
On December 22, the Financial Services Commission, Financial Supervisory Service, Ministry of Economy and Finance, and Ministry of Land, Infrastructure and Transport held a "Real Estate PF Status Review Meeting" at the Korea Federation of Banks in Jung-gu, Seoul, to discuss the current state of non-performing real estate PF loans and measures for improvement.
According to the Financial Services Commission and the Financial Supervisory Service, as of the end of September, the total domestic real estate PF exposure (amount at risk) stood at 177.9 trillion won, down 8.7 trillion won from the previous quarter. Compared to the end of last year, when it was 202.3 trillion won, the exposure has decreased significantly.
Domestic real estate PF exposure includes not only real estate PF loans but also land-secured loans and debt guarantees, as well as all other PF-related products. An official from the Financial Services Commission explained, "The reduction in exposure due to project completion, liquidation, and restructuring has outpaced the issuance of new PF exposures, resulting in an overall decline in total real estate PF exposure."
As of the end of September, the amount of loans classified as "watch-list" or "non-performing" based on project viability assessments stood at 18.2 trillion won, accounting for 10.2% of total PF exposure. The amount of such loans has declined for two consecutive quarters, from 21.9 trillion won at the end of March to 20.8 trillion won at the end of June, and then down to the 18 trillion won range in September.
As of the end of September, the delinquency rate for PF loans in the financial sector was 4.24%. Despite a reduction in outstanding PF loan balances, the rate dropped by 0.15 percentage points from the previous quarter, reflecting the impact of ongoing bad loan resolution efforts by financial institutions.
The delinquency rate for land-secured loans at small and medium-sized financial institutions (savings banks, credit card companies, and mutual finance institutions) remained high at 32.43%. However, financial authorities assessed that this is not a dangerous situation, as the increase in the numerator (delinquent loans) occurred alongside a significant decrease in the denominator (total loan balances).
New PF loan issuance has increased, particularly for projects with strong business viability. In the third quarter, new PF loans amounted to 20.6 trillion won, up 4.2 trillion won year-on-year. An official from the Financial Services Commission stated, "New funds continued to flow into the PF market, especially for high-quality projects with solid business prospects."
16.5 Trillion Won in Non-Performing Projects Resolved
According to the Financial Services Commission, a total of 16.5 trillion won in watch-list and non-performing projects were resolved or restructured from the second half of last year through September this year. Of this, 11.8 trillion won was resolved through public auction, private contracts, and write-offs, while 4.7 trillion won was restructured through new funding and changes in capital structure.
As non-performing projects were resolved, the PF substandard and below loan ratio fell by 8.0 percentage points, and the PF delinquency rate dropped by 5.8 percentage points, resulting in improved soundness indicators.
To continue supporting the resolution and restructuring of ongoing real estate PF projects and the supply of new funds, the Financial Services Commission announced that it will extend nine out of ten temporary financial regulatory relief measures related to real estate PF, which are deemed still necessary, until June next year. The specific timing for normalization will be determined in the first half of next year, taking into account the conditions of the real estate PF market.
At the meeting, measures to improve the soundness of the real estate PF system were also discussed. To prevent excessive contraction of the PF market, it was decided to allow exceptions to lending restrictions (equity ratio requirements) when actual risk is low. In addition, the plan is to differentiate risk weights and loan loss provisions, and to restrict lending based on the equity ratio relative to project costs. After a one-year preparation period, these measures will be implemented starting in 2027. To minimize market shock, the new requirements will apply only to new loans, with the equity ratio gradually raised from 5% to 10%, then to 15%, and finally to 20% over four years.
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