Major banks write off over $2.3 bil. in bad debts in H1

A person walks by an empty building in Myeongdong, Seoul, July 1. Yonhap

Major banks offloaded over 3.2 trillion won ($2.3 billion) in bad debts during the first quarter of this year, data showed Sunday. This move is seen as an effort by major banks to manage their financial stability, as households and businesses struggle to meet their debt obligations due to high interest rates and an ongoing economic recession.

Five major banks — KB, Shinhan, Hana, Woori and NH Nonghyup Bank — wrote off around 3.27 trillion won worth of bad debts during the first half of 2024, according to data obtained from the lenders. The figure is up 1.5 times compared to the same period of last year.

Banks classify loans that are more than three months overdue as being unlikely to be recovered and either write them off their books or sell them at a steep discount to asset management companies.

The amount of such loans written off by banks surged from 2.3 trillion won in 2022 to 5.4 trillion last year and continues to rise this year.

One major reason is the increasing number of borrowers who are unable to repay their loans due to high interest rates.

"The loan delinquency rate has reached the highest level since 2019, prior to the COVID-19 pandemic," an official at a major bank said. "Amid persistently high inflation and interest rates, domestic demand has not recovered, resulting in an increased debt burden for both households and businesses."

The recent recovery of the housing market, coupled with an increase in policy loans aimed at assisting low-income households, has also pushed up the amount of loans.

According to the Financial Supervisory Service (FSS), household loans have sharply increased by about 14 trillion won over the past three months. After consecutive declines in February and March, the trend reversed with increases of 4.1 trillion won in April, 5.3 trillion won in May, and 4.4 trillion won in June.

This trend has prompted financial authorities to tighten their grip on major banks. Starting Monday, the FSS will begin field inspections to ensure that the five major banks and internet-only KakaoBank are complying with the government's debt regulations.

The inspection will focus on whether banks have adhered to their yearly business plans in managing household loans, or if there are any instances of loans being issued in circumvention of debt service ratio (DSR) regulations.

DSR is calculated by dividing the annual principal and interest payments on all loans from financial institutions by the borrower's annual income. This system was introduced to ensure that individuals borrow within their repayment capacity. Currently, the DSR limit is set at 40 percent for bank loans and 50 percent for non-bank loans.

"Banks that fail to adhere to household loan guidelines will face sanctions in accordance with banking supervision regulations," an FSS official said.