Internet Banks Face Growing Asset Quality Pressure as Lending to Mid- and Low-Credit Borrowers Expands

Financial Services Commission to Raise Internet Bank Lending Ratio to Mid- and Low-Credit Borrowers from 30% to 35% by 2030
KakaoBank Only Internet-Only Bank Among Top Three to See Increase in Non-Performing Loans
Asset Quality Indicators Such as Delinquency Rate Also Worsen

As the Financial Services Commission announced the expansion of lending to mid- and low-credit borrowers as a key agenda item in its policy briefing on inclusive finance, internet-only banks are expected to face increased pressure. With household lending restricted, so-called "non-performing loans"-also referred to as "empty loans"-are on the rise, and asset quality indicators such as delinquency rates are deteriorating. Internet banks are seeking breakthroughs by expanding foreign currency products and strengthening their platform businesses, but analysts predict that their growth momentum will be dampened for the time being.

According to the financial sector on December 24, the Financial Services Commission plans to gradually raise the target for new loans to mid- and low-credit borrowers by internet banks from the current 30% to 35% by 2030. The target ratio will be increased by 1 percentage point each year. This move is intended to reinforce the core function of inclusive finance, in line with the original purpose of establishing internet banks to support mid- and low-credit borrowers who are marginalized in the institutional financial system. However, with growth slowing due to household lending regulations and concerns mounting over asset quality deterioration from rising non-performing loans, internet banks are inevitably facing greater burdens.

Currently, asset quality indicators vary among internet-only banks. KakaoBank is the only one among the three (KakaoBank, K Bank, and Toss Bank) to see increases in both non-performing loans and substandard or lower loans. Non-performing loans are those for which both principal and interest are difficult to recover, commonly known as "empty loans." These are characterized by the suspension of principal and interest payments for over three months, or due to debt restructuring or court receivership, resulting in no income being generated. In the financial sector, these loans are classified as a more severe form of bad debt than substandard or lower loans.

According to KakaoBank's third-quarter business disclosure, its non-performing loans (combined household and corporate) stood at 247.1 billion won in the third quarter of this year, with a ratio of 0.55%. This is an increase from 187.4 billion won (0.44%) in the third quarter of last year. Asset quality indicators have also worsened. As of the third quarter of this year, KakaoBank's delinquency rate was 0.51%, up 0.03 percentage points from 0.48% in the same period last year.

Substandard or lower loans have also increased. The non-performing loan ratio (NPL) refers to the proportion of loans that are overdue for more than three months and are considered difficult to recover. KakaoBank’s substandard or lower loans (combined household and corporate) in the third quarter of this year amounted to 250.2 billion won, with a ratio of 0.55%. This represents an increase of 61 billion won and 0.11 percentage points from 189.2 billion won and 0.44% in the same period last year, respectively.

KakaoBank has the largest volume of loans to mid- and low-credit borrowers among the three internet-only banks, which is why the increase in substandard or lower loans and non-performing loans is relatively rapid.

Toss Bank saw a decrease in both non-performing loans and substandard or lower loans, but its delinquency rate actually rose. In the third quarter of this year, Toss Bank’s non-performing loans (combined household and corporate) stood at 81 billion won (0.52%), down from 115.4 billion won (0.79%) in the third quarter of last year. Substandard or lower loans (combined household and corporate) also fell by 24.2 billion won, from 154.5 billion won to 130.3 billion won over the same period, and the non-performing loan ratio dropped by 0.21 percentage points from 1.05% to 0.84%. However, the delinquency rate increased from 0.99% in the third quarter of last year to 1.07% in the third quarter of this year.

In contrast, K Bank saw a slight improvement in its overall asset quality indicators. As of the third quarter of this year, K Bank’s non-performing loans (combined household and corporate) were 116.7 billion won (0.65%), down from 207.2 billion won (1.28%) in the same period last year. Substandard or lower loans (combined household and corporate) also decreased from 135.5 billion won (0.84%) to 96.4 billion won (0.54%) over the same period. The delinquency rate improved from 0.88% to 0.56%.

A financial industry official stated, "With the growth of household lending restricted, expanding corporate lending such as loans to individual business owners is inevitable. However, as the economy slows, delinquency risks are rising, especially among vulnerable borrowers. From next year, as productive finance becomes more prominent, managing delinquency rates and securing asset quality will be key challenges for the financial sector."