By Kim Jae-kyoung
Staff Reporter
Local banks are expected to become more alert over the credit risk of loans to smaller firms and households in the first quarter of the year due to the prolonged economic downturn.
In its latest survey of 16 local banks, the Bank of Korea (BOK) found that banks expect the risk for smaller firms to reach a 10-year high between January and March because it is feared the deepening downturn will produce more bad loans.
According to the survey, the index gauging smaller firms' credit risk, the likelihood of borrowers not repaying a loan or debt, came to 59, up from 56 in the fourth quarter, the highest in a decade.
A credit risk index of zero means the number of banks expecting a rising risk is equal to those forecasting a declining risk in the future: the higher the index, the greater the expected credit risk.
``Local banks expect that companies' earnings will deteriorate due to an anticipated deterioration in the business environment,'' a BOK economist said.
``There are signs of a rising overdue rate of loans to smaller firms and a downgrading of credit ratings,'' he added.
Banks also expect a rising default risk of consumer loans in the coming months. The index measuring credit risks for households stood at 31 in the first quarter, up from 25 in the fourth, the highest figure since it posted 44 in the third quarter of 2003.
The survey also shows that banks will ease the screening of credit in the coming months.
The index for banks' attitude toward loans in the first quarter was estimated at minus 16, compared with last quarter's minus 23. But it is still well below the benchmark.
A lending attitude index reading of zero means the number of banks willing to expand loans is equal to those planning to reduce household loans: the higher the index, the stronger the lending willingness of banks.
Local banks, which are struggling to shore up their capital base, have been reluctant to lend to local firms and households over fears that a prolonged economic slump may create more bad loans. The government has urged local lenders to make more credit available to firms and households.