By Kang Seung-woo
Staff reporter
Local banks' loan default rate reached the highest level in nine months in May due mainly to increased delinquencies by small- and medium-sized enterprises (SMEs).
The Financial Supervisory Service (FSS) said Monday that the average loan default rate at 18 local lenders stood at 1.2 percent of their total lending in May.
The figure was 0.1 percentage points higher than the previous month and the highest since February 2009, when it recorded 1.67 percent.
In addition, the rate soared for the second straight month. The delinquency rate covers bank lending whose principal repayment is overdue by one day or longer.
According to the financial watchdog, a growing number of loans extended to SMEs are turning sour in the wake of the global financial crisis.
The default rate on SMEs saw a sharp increase of 0.2 percentage points from April to 1.88 percent, while that of bigger companies gave up 0.1 percentage point.
The arrears from SMEs have grown from 7 trillion won ($5.84 billion) in March to 8.4 trillion won in May.
"Bad loans in project financing (PF) are blamed for the increase," an FSS official said.
PF is the financing of a long-term project, usually real estate development such as the building of apartments or shopping centers, in which the debt is paid back from the profit generated by the enterprise. Hence, financial institutions give out loans if they determine that the project will be profitable.
"We think that the situation at SMEs has deteriorated on the whole," the official added.
Seasonal factors also had an influence on growth.
He said the delinquency rate tends to rise two months before the end of each quarter ― in January, February; April, May; July, August; and October, November ― because banks sell or write down a larger amount of bad loans before closing their books.
As for household loans, their delinquency rate stood at 0.62 percent, up 0.04 percentage points from the previous month, due to rising defaults on mortgages.