Non-bank lenders unnerved by growing exposure to construction, property debts

A man passes by a savings bank in Seoul, Sunday. Yonhap

A growing number of credit cooperatives and insurers are increasingly exposed to insolvency risks associated with borrowers in the construction and real estate industries, in what could become a full-blown series of defaults by small players, data showed Monday.

Advancing the concerns is the ongoing fiasco of Taeyoung Engineering & Construction. The troubled builder is undergoing a three-month debt workout program prompted by a mismanaged debt of at least 2.6 trillion won ($1.9 billion). Creditors say the liable total is well over 16 trillion won, including 1.3 trillion won in direct borrowings and credit and payment guarantees.

Experts say the rapid buildup of bad debts over the past few pandemic years since the 2017 property market boom should be written off gradually, as aided by the project financing restructuring program under the state-run Korea Asset Management Corp. (KAMCO).

Data submitted by the Bank of Korea to Rep. Yang Kyung-sook of the main opposition Democratic Party of Korea, a member of the National Assembly Strategy and Finance Committee, showed the delinquency rates for construction and real estate loans in non-banking sectors in the third quarter of last year reached all-time highs of 5.51 percent and 3.99 percent, respectively.

The figures were 3.1 times and 2.6 times higher than 1.77 percent and 1.55 percent a year earlier.

The rates are equally concerning as measured by non-performing loans (NPLs) in which interest payments were 90 days past due and therefore considered unlikely to be repaid by the borrower.

The delinquency rates for NPLs were 7.34 percent for the construction industry and 5.97 percent for the real estate industry, up 3.3 times and 2.4 times higher than the year prior, respectively.

The 7.34 percent figure is the highest since the related statistics began being compiled in 2018, and the 5.97 percent is a 10-year high.

Even in the banking sector with relatively low real estate exposure, the delinquency rates in the two industries hit an eight-year high of 0.58 percent and 13-year high of 0.15 percent.

The central bank maintains the probability of Taeyoung's case triggering a full-fledged financial crisis is limited, since the isolated case of the 16th-largest industry player is a prime example of botched project financing brought on by heavy, uncontrolled borrowing relative to its equity.

However, market watchers say the fears of outright defaults are lingering, as foreshadowed by the bank-commissioned financial stability report and monetary credit policy report.

“The rapid increases in the delinquency rates in non-banking sectors are explained in large part by steady insolvencies over the past few years of slowdown in the property market,” the central bank said in its monetary credit policy report. “A further rise in the rates is not ruled out, with recent market conditions factored in.”