Apartment complexes are seen from Mount Nam in Seoul, Sunday. Yonhap

The ratio of non-performing loans in the construction sector at major banks increased significantly in the first half of this year amid sluggish domestic demand and a slowdown in the industry.

The figure not only rose substantially compared to a year ago, but also is notably higher compared to other industries such as manufacturing.

According to data from the Korea Federation of Banks, Monday, the total loans to the construction sector by the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — amounted to 28.6 trillion won ($21 billion), with non-performing loans that are more than three months overdue reaching 457.5 billion won, or 1.6 percent, as of the first half of this year.

In comparison, the total loans in the first half of last year came to 24.2 trillion won, with non-performing loans accounting for 282.5 billion won, or 1.17 percent. This represents an increase of 0.43 of a percentage point in the non-performing loan ratio over the past year.

The loan quality in the construction industry was notably worse, as the non-performing loan ratios for all other sectors were below 0.5 percent.

For example, the total loans to the manufacturing sector amounted to 285 trillion won, with non-performing loans recorded at 921.2 billion won, or 0.32 percent. In the accommodation and food service sector, loans totaled 41 trillion won, with non-performing loans amounting to 176.7 billion won, or 0.43 percent.

The non-performing loan ratio in the construction industry was five times higher than that of the manufacturing sector.

Industry officials attributed the rising non-performing loans in the construction industry to stagnating domestic demand and a slowdown in business conditions.

According to the government data, the quarter-on-quarter growth rate of the construction industry recorded 5.5 percent in the first quarter of this year, but it recorded minus 6 percent in the second quarter, marking the worst performance in 26 years since the 6.4 percent contraction recorded in the first quarter of the 1998 Asian financial crisis.

Additionally, the risks on short-term loans to finance construction projects, called project financing loans, have grown due to a slump in property markets and rising costs of construction materials as well as high interest rates.

"The growing risk of the real estate project financing sector has been reflected in the financial health indicators for the construction industry," an official from a major bank said.

In June, the Bank of Korea warned in its report: "Amid the deterioration in the financial health of banks' project financing loans, it is important to be aware of the potential risks spreading to other financial sectors, as contingent liabilities are materializing for securities firms, real estate trusts and construction companies."