Korea’s savings banks face rising risks as overdue property loans doubles

[Photo by Lee Seung-hwan]

South Korean savings banks had 919.7 billion won ($697.2 million) in overdue payments on property-related debts last year, more than doubling from 2021, raising concerns of rising risks in these financial institutions should the real estate market fails to recover soon.

According to Maeil Business Newspaper on Wednesday, overdue debt at 79 local savings banks reached 546.4 billion won and 653.4 billion won in the first and second quarters of last year, respectively. Arrears jumped to 855.5 billion won in the third quarter and then slowed to 919.7 billion won in the fourth quarter.

Overdue debt means a debt that the debtor doesn’t pay on the due date. Debtors can be regarded as debt defaults when they fail to pay interest for at least one month.

Real estate-related loans encompass real estate-related project financing and construction mortgage loans. As mortgage loans are based on the value of collateral, a fall in the value is likely to result in a higher risk of a debt default. The delinquency rate of some savings banks in rural areas exceeded 10 percent level as loans issued to construction firms were delinquent.

Financial Supervisory Service Governor Lee Bok-hyun said that the FSC chose 300 to 500 real estate project financiers to monitor their financials. “The list doesn’t mean a risk of bankruptcy. We will monitor the financiers more closely to prevent systemic risk,” said Lee.

Meanwhile, savings banks have become conservative in giving mortgage loans. At the end of 2022, the total amount of mortgage loans at savings banks rose 25 percent from a year ago to 35.8 trillion won. Typically, these financial institutions increased these loans by 3 trillion won every quarter, but that has been reduced to 300 billion won to 500 billion won since the second half of last year.