Monitoring the loan default rate of Korean banks

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Recently Korean financial watchdog, FSS (Financial Supervisory Service) announced that the loan default rate keeps escalating in sustainable basis regardless of the fact that there are no significantly volatile changes. However, suffering from prolonged industrial recession of construction and shipbuilding sectors in particular, companies are consistently behind their payment due. Household and mortgage loans are being late for the payment due and its default rate seems uncomfortably rising as well. Learned a harsh lesson from the past, financial authorities keep overseeing the change of loan default status in any given time to prevent revisiting the previous financial crisis.

As of April, the default rate of bussiness loan (KRW denominated only) reached 1.49% overall, increased by 0.17%p from the figure on March. To be more specific, large companies led this rate to keep go upward trend not only because certain sectors, such as a contruction sector who mostly large companies engaged in never seems to be rebound until overall economic condition begins to turn around eventually, but also a shipbuidling sector, which is considered as No. 1 in the world, are still suffering from cash shortage. Typically shipbuilders receive the payment in installment by ship processing from buyers. So advanced payment from buyers can be a main source of cash for builders and production should be proceeded in accordance with vessel building schedule in order not to prevent any late payment(including penalties). However, since shipbuilding orders had been slow down with global recession, shipbuilders see no more cash inflow and borrowings keep piling up with interest rate. It is obvious that small medium companies keep its default rate as high as April’s in last year, 1.73%. Due to the fact that Korean economy is heavily dependant upon large companies, which small and  medium companies are either suppliers or subordinated to large companies and mostly small and medium companies are more vulnerable to economic condition, the loan default rate of businesses can not be under control until overall economy pick up soon.

The default rate of private mortgage loan also keeps its upward trend. Overall the rate has increased up to 0.89%. According to an analysis report, a sluggish condition of real estate keep lowering transaction price down and individual borrowers feel unease now. General mortgage loan except collective mortgage loan relatively have more comfortable increase than collective mortgage loan, lending money to borrowers who are qualified to the certain criteria and group in terms of collective basis, which increased by 0.04%p basis. It is also concerned that private loan except mortgage loan is running behind its due. The default rate is up to 1.08% by 0.07%p from last month.

Considering the fact that economy outlook is not as optimistic as earlier this year, recently BOK (Bank of Korea) revised the economy outlook in 2012 down to 3.5% from 3.7%, due to the global uncertainty and consistent recession of business sector such as construction and shipbuilding, financial authorities demand local banks to implement more strict and efficient control of overdue loan by all means.

Jinmok.kim  (jinmok.kim@gmail.com)

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