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Financial authorities and loan creditors cooperate to prevent crisis
By Anna J. Park
Risks stemming from real estate project financing (PF) is looming large as one of key threat factors in the local financial sector this year. Securities companies particularly experience a high default rate of their loans to real estate PF, concerning market watchers that a negative chain reaction could result in a crisis for the market.
According to data submitted by the Financial Supervisory Service (FSS) to the parliament this week, the total amount of loans to real estate project financing stood at 125.3 trillion won ($99.2 billion) as of September last year, up by 15.1 trillion won from the year 2021. When compared to the figure from 2020, the number has increased by over 35 trillion won in just two years.
By sector, 35.2 percent of the loans, or 44.1 trillion won, were lent by insurance companies, while banks lent 27.2 percent of the debts to real estate project financing. Capital companies, savings banks, mutual funds and securities companies also lent 21.6 percent, 8.5 percent, 3.8 percent and 3.6 percent of the loans, respectively.
What is worrisome is that securities companies are experiencing the highest loan default rates of real estate project financing. Securities companies' delinquency rates in their project financing loans stood at 8.2 percent as of September last year, which is 4.5 percentage points higher than the previous year. That rate is more than six times that of 2019 when the rate stood at 1.3 percent.
Savings bank's delinquency rates stood at 2.37 percent in late 2022, 1.18 percentage points higher than the previous year. Capital companies and insurers posted much lower loan default rates of 1.07 percent and 0.4 percent last year. Yet, the high delinquency rates of real estate project financing borne by securities companies stoked the average default rates of the entire financial industry to 0.9 percent last year, 0.52 percentage points higher than the previous year.
While the increase in the average loan default rates concerns market watchers due to the possibility that it could spill over to other financial industries, burdening already-fragile systems, financial authorities say the situation is not yet that severe.
"The average delinquency rates of real estate project financing, which had been on a downward movement until 2021, has redirected to an upward trend during last year," an official from the FSS said. "However, the increase in the default rates is not yet posing a grave concern to the market," the official added.
The official explained that as the total amount of loans to real estate project financing by securities companies is far smaller than other financial companies ― only 3.6 percent of the country's entire loans made to real estate PF ― insolvency at just one or two real estate projects lent by securities companies raise their default rates.
At the same time, the financial authorities have decided to strengthen monitoring of the market under the circumstances. Also, more than 200 financial companies plan to launch an assembly of creditors during the first quarter of this year to manage project financing at the risk of insolvency. Such a large-scale assembly of creditors was operated during the global financial crisis in 2008, facilitating necessary capital supply and delay of bond maturities.
In addition, financial investment companies are currently reviewing the prolonging of ongoing market stabilization measures, such as buying asset-backed commercial paper (ABCP) related to real estate project financing, for providing necessary liquidity support to small and medium-sized securities companies. The 1.8 trillion won-sized bond-buying program is supposed to continue until the end of May, but there are plans to prolong its operation further.