Banks in dilemma over surging loan-to-deposit ratio

A small business owner, left, listens to an explanation about financial support programs at Shinhan Bank in Seoul. / Yonhap

By Lee Min-hyung

Commercial banks here are voicing concerns over their surging loan-to-deposit ratio amid the government's pressure on them to extend loan benefits to borrowers affected by the economic fallout of the COVID-19 pandemic, industry officials said Friday.

As of the end of the second quarter, the ratio at KB Kookmin Bank, the nation's largest lender, was 100.4 percent. This exceeds the government's recommended upper limit.

Other major lenders ― such as Shinhan, Hana and Woori ― also reported a rise in the ratio, as they have been pressed to extend the maturity dates for loans offered to small- and medium-sized enterprises as well as small business owners hit hard by the nationwide coronavirus. Financial authorities have also urged banks to delay receiving interest from loans to help virus-hit parties recover from the pandemic shock.

But this is shifting more of the financial burden to existing banks, data shows. At Shinhan Bank, the ratio increased to 99.4 percent as at the end of June, up 2.9 percent from the previous quarter. Hana Bank also reported 97.5 percent, an increase of 0.7 percent in the same period.

Financial authorities were also aware of the lenders' growing burden, so the authorities eased a regulation on the upper limit of the ratio. Under the temporary decision, authorities will not slap sanctions on lenders whose loan-to-deposit ratio is managed with a margin of 5 percentage points from the current limit of 100 percent until the end of June 2021.

“When the ratio surpasses 105 or even 110 percent, this will end up causing serious concerns to existing lenders in terms of their financial soundness,” said an official from a major lender here.

“But the recent rise in the ratio is due to an exceptional circumstance ― the COVID-19 outbreak ― and the government's request for banks to expand financial benefits to the market.”

But lenders have a close eye on rising ratio, and will take necessary measures to control its upper limit of 100 percent in the latter half of this year, according to the official.

But banks here are under growing pressure over the ongoing talks with the Financial Services Commission that they need to continue offering the financial benefits for a longer period, possibly until the first half of next year.

Under pressure from the authority, banks will likely extend the maturity date for loans and delay receiving interest payments for at least another six months from the end of September.

“When the figure is around 100 percent, we do not see it as a serious issue,” another source said. “But banks need to keep a close eye on it, as the ratio will go up when we take steps to continue offering the benefits to pandemic-hit companies and individuals.”