Snowballing debt raises concern over defaults

Gettyimagesbank

By Lee Kyung-min

Over 20 percent of households consisting of self-employed persons is feared to see their debt surpass their income next year, if the current extension of loan and deferring of interest payments lapses in March 2021, putting the authorities in a bind over whether to continue emergency financial assistance put in place to weather the prolonged Covid-19 pandemic induced economic crisis.

Commercial lenders are becoming increasingly fretful over a steep rise in the number of firms and households failing to make interest repayments on loans, a strong indication of insolvency.

Industry officials and the central bank say loan screening should be strengthened to help distinguish borrowers experiencing a short-term liquidity squeeze from “zombie firms” with questionable interest payment ability, a crucial step to maximize the effective allocation of limited resources.

Data from a Bank of Korea report released Dec. 24 on financial stability showed that of 2,298 firms that publicly list their financial statements, 2.5 percent will experience a liquidity shortage of 600 billion won ($543 million) in 2021, a baseline scenario that can take a turn for the worse if their sales continue to plunge. About 4.4 percent of those in that scenario will experience a liquidity shortage totaling 4.2 trillion won.

But the situation will take a far more dramatic turn if the current financial assistance lapses as scheduled, pushing up the amount for each group to 4 trillion won and 7.7 trillion won, respectively.

Also delinquency rates are expected to increase to a range of between 1.05 and 1.25 percent, from between 0.6 and 0.8 percent, maintained only because of the extension of lending programs.

The self-employed will have to brace for strained financial conditions, the report added.

The proportion of self-employed people set to report cumulative household debt from January 2020 to December 2021 is expected to account for 16.6 percent of the total next year in the baseline scenario, and inch up to 19.3 percent in the worst case scenario.

But the figure is forecast to jump to 20.3 percent and 22.4 percent, respectively, if the financial measure extension lapses.

Some 7.8 percent to 8.5 percent of households will experience a liquidity shortage, defined as their cumulative household debts exceeding their financial assets next year.

But the figure will soar to between 9.4 and 10.4 percent if the support comes to an end, entailed possibly by up to 2.2 percent of households defaulting on their debt.

The growing concern was addressed during a meeting presided over by Financial Services Commission (FSC) chairman and attended by heads of major commercial banks including KB Kookmin, Hana, Shinhan, Woori and NH Nonghyup, and state lenders.

Some of them said the financial extension will lead to rapid deterioration of their banks' financial soundness since the program has already been extended twice ― once to September and then again to March next year.

Data from the Korea Federation of Banks showed that 95 billion won in loan repayments have been deferred as of November. This according to industry officials means 3.8 trillion won in shaky loans, if a 2.5 percent borrowing rate was applied.

“Banks are right to be worried by their financial soundness, since the current emergency measure applies to firms across the board regardless of their financials,” Seoul National University economist Kim So-young said.

Meanwhile, the Korean economy growth outlook for 2021 will be determined largely by the scope and extent of the strengthened social distancing rules, as exports are expected to log 6 percent year-on-year growth, driven mostly by the information technology, semiconductor and bio sectors.

The Ministry of Economy and Finance said the figure is expected to be 3.2 percent, whereas the BOK said 3 percent.