Concerns rise over PF loans amid high interest rates, weak real estate market

[Photo by Lee Seung-hwan]

Amid growing concerns regarding the stability of real estate project financing (PF) due to high interest rates and a sluggish real estate market in South Korea, recent data has unveiled a significant revelation: capital companies alone bear an outstanding loan burden of 24 trillion won ($18.5 billion), accompanied by delinquent balances soaring to an alarming 1 trillion won.

According to the breakdown of real estate PF loans by financial companies (banks, insurers, mutual finances, savings banks, security firms, and capital companies), as of the end of September this year, capital companies’ loan balance reached 24 trillion won, the third largest after banks (44.2 trillion won) and insurers (43.3 trillion won), followed by savings banks (9.8 trillion won) and securities companies (6.3 trillion won). The analysis was conducted by Maeil Business Newspaper on Monday based on data from the Office of Rep. Yun Chang-hyun and the Financial Supervisory Service (FSS).

This is the result of a significant increase in PF lending by capital companies and other secondary financial institutions such as savings banks and mutual finances in pursuit of diversified business ventures following the real estate boom since 2018.

While banks and insurance companies held significant balances of real estate PF loans, their delinquency rates were comparatively lower than other players in the circle. Banks maintained delinquency rates in the 0 percent range, while insurers reported 1.1 percent. In contrast, capital companies and security firms faced delinquency rates of 4.6 percent and 13.0 percent, respectively.

The delinquent balance in real estate PF loans from capital companies, surpassing 1 trillion won for delays exceeding one month, reached alarming levels. Just until last September, the delinquent balance of capital companies stood at around 300 billion won, escalating to more than three times its previous level within a year. Following capital companies, security firms reported a delinquent balance of 900 billion won as of the end of June this year, trailed by insurers and savings banks at around 500 billion won each, while mutual finances recorded levels around 200 billion won.

Even in the assessment of the loan balance falling under the substandard, doubtful, and estimated loss categories among the five criteria used by financial institutions to judge creditworthiness, indicating the size of impaired loans, signs of crisis were evident particularly in capital companies and security firms. Within the substandard or worse category of real estate PF loans, security firms held the highest balance at 1.2 trillion won, followed by capital companies at 1 trillion won.

In PF loans, while loans from banks often hold priority, capital companies or savings banks often carry subordinate debts. If a crisis among construction firms spreads, there could be a possibility of additional delays or defaults in loan balances. This situation could be devastating for capital companies, which have much larger loan balances, compared to securities firms and savings banks.