|People seeking to take out loans sit in front of tellers at a bank in Seoul, in this file photo. Korea Times file|
By Lee Kyung-min
Commercial banks are rushing to impose stricter lending rules following a spike in credit-backed borrowing from individuals and low-income businesses run by the self-employed, in a precautionary measure to rein in default risks triggered by the economic crisis amid the spread of the COVID-19 pandemic.
The collective move is explained by a drop in delinquency rates in June from a month earlier, a statistical illusion created due to a spike in loans taken out from stock investors and mortgage seekers amid the record-low borrowing rate.
Experts say the rapidly rising debt not backed by strong economic recovery in sight will be a "ticking time bomb" that will hit the fiscal soundness of lenders whose financials will tank once repeated delinquency rates develop into full-fledged defaults.
The country's top five banks ― KB Kookmin, Shinhan, Hana, Woori and NongHyup ― have initiated strengthened measures to monitor and manage high-risk borrowers and at-risk businesses.
Hana Bank began to demand individual customers put up more collateral to hedge against possible defaults. It also imposed more stringent lending requirements for first-time borrowers in the eateries and lodgings businesses, hit directly by the virus pandemic with no immediate prospect to rebound any time soon.
"Risk management is needed for us to be prepared against any chance of the bank's financials deteriorating due to an unexpected worse turn of events," a Hana official said.
KB Kookmin Bank began a ratings and performance review of country's industries, a regular procedure moved up by a couple of months to better assess the credit risk brought on by the pandemic.
The maximum amount of loans will be reduced for people in virus-hit industries, following a lowered credit rating due to poor earnings recorded in the first six months of 2020.
Businesses that require in-person services will directly be affected, while no major changes are expected for contact-free service providers.
Borrowers with reduced income or a rise in debt can be asked to pay back part of the loan when the bank reviews the request for a maturity extension annually.
Woori Bank tightened lending rules for individual borrowers seeking up to a 200 million won ($166,000) loan by reducing the loan-to-income ratio for each borrower, a move undertaken by Shinhan Bank which lowered the ratio for workers at large firms, the group of people long considered low-risk with a strong ability to repay.
Woori also plans to limit loans for eatery businesses to 100 million per person in accordance with the moves from its peers.
Low delinquency ratio hardly good news
The measures came amid an increase in credit-based loans taken out by individuals in June, with the figure jumping 7.6 trillion won to 117.5 trillion won from six months earlier. The figure for the self-employed increased to 254.3 trillion won, up 16.9 trillion won in the same period.
But, the delinquency ratio, defined as interest payments on loans delayed for at least one month divided by the total outstanding loan, has yet to be factored into the soaring debt.
The overall delinquency ratio stood at between 0.21 percent and 0.33 percent in June, down from a range of between 0.25 percent and 0.4 percent in May.
That for household loans dropped to a range of between 0.13 percent and 0.29 percent, from 0.18 percent and 0.33 percent over the same period. The figure for corporate debt was between 0.18 percent and 0.38 percent, down from 0.24 percent and 0.39 percent.
A lowered ratio should usually indicate fiscal soundness in the banking sector, but implications inferenced from the dataset over the past month are anything but, according to an expert.
"The ratio dropped, not because the number of people defaulting on payments on their debt decreased but because that of loan takers soared. The ratio will jump in the coming months with more people feeling the pinch of the economic meltdown," Seoul National University economist Lee In-ho said.