By Kim Jae-kyoung
Staff Reporter
Banks are becoming increasingly concerned over rising default risks of loans extended to small and medium-sized enterprises (SMEs) with overdue rates on such loans growing rapidly.
What is of more concern is that credit risks associated with smaller firms are expected to continue their upward trend down the road, due to worsening profitability caused by high-flying oil costs.
Hana Bank saw the overdue rate on loans to small and medium firms surge to 1.71 percent in May compared with 1 percent in June 2007.
The rate at Shinhan Bank increased from 0.72 percent to 1.25 percent during the same period, while the rate at Kookmin Bank jumped from 0.55 percent to 0.9 percent.
Despite the economic slowdown, the outstanding balance of loans extended to SMEs by five local banks ― Kookmin, Shinhan, Woori, Hana and the Industrial Bank of Korea ― stood at 267 trillion won in May, up 8.8 percent from last December.
According to the Bank of Korea (BOK), default risks associated with loans to these firms are expected to continue to rise in the months to come, due to the downturn.
In its latest survey of 16 domestic banks, the central bank found that they expect to be exposed to greater credit risk associated with smaller firms in the coming months, with the ``credit risk index'' estimated at 44.
A credit risk index of zero means the number of banks expecting a rise in credit risk is equal to that of those forecasting a decline in risk in the future. The higher the index goes up, the greater credit risk will be.
The index of 44 is the highest level in five years since the third quarter of 2003 when it stood at 50.
The credit risk index for large firms and households also increased to 6 and 25, respectively, from 0 and 13 a quarter ago. The index for households was the highest in four years since the first quarter of 2004.
``More loans to small businesses and households are expected to become insolvent in the third quarter due to economic downturn and falling profitability,'' BOK economist Kim Myeong-suk said.
The survey shows that banks are likely to strengthen their credit screening in the coming months on expectations that loans are more vulnerable to risk.
The index for banks' attitude toward loans to SMEs in the third quarter was estimated at minus 19.
A lending attitude index reading of zero means the number of banks willing to expand loans is equal to that of those planning to reduce household loans. The lower the index is, the weaker a banks' lending willingness becomes, and vice versa.