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Korea's financial services firms should strengthen their credit risk management as loans to overleveraged borrowers, such as the self-employed, are running high risks of going bad amid the economic downturn, the Bank of Korea (BOK) said in a report, Monday.
In particular, the central bank urged savings banks to take greater precautions against increased default risks as many of their low-credit customers have increased their borrowing from multiple low-tier lenders amid the deteriorating business environment.
The warning is based on the central bank's assessment of the degree and extent of how a credit default triggered by "high-risk" borrowers ― notably the self-employed ― would increase a systemic risk to financial institutions.
This was done by analyzing a "contagion index," the sum of fundamental default risks and default by contagion. The higher the number, the greater the expected default risk.
The report showed the index for the self-employed has risen since the third quarter of 2015 with the particularly vulnerable being those in the wholesale, eateries and real-estate rent businesses.
The rise is an indication that businesses took out more loans from multiple non-banking lenders including card firms, credit unions, credit cooperatives and insurers.
This means people in need of quick loans turned to such low-tier lenders despite higher interest rates, as an alternative to bank loans that follow stricter screening procedures based on good credit.
"Those who borrowed from savings banks are more likely to default compared to those who borrowed from commercial banks. Their increased borrowing from low-tier high-interest financial services firms could contribute to greater systemic risks," a BOK official said.
The borrowers are particularly vulnerable to a key base rate hike, as their already high borrowing rate will spike further, but this is not an immediate concern given the key rate is on a downward path, the BOK said.
"Continued monitoring is required to prevent any unfortunate scenario, especially on the self-employed whose default rate is continuing to rise," a BOK official said.
The central bank added that stringent monitoring was also required on card firms and non-card credit financing institutions, both of which are linked closely to the financial condition of savings banks.





































