Banks scramble to offload bad debt amid prolonged economic slowdown

The lobby of a commercial bank in Seoul / Korea Times file

Leading commercial lenders are rushing to sell off bad debt, prompted by heightened corporate distress and credit default concerns amid prolonged economic downturn, market watchers said Wednesday.

The sharp uptick in the nonperforming loans (NPL) sell-off is a warning sign. A rise in debt service burdens for self-employed and small businesses means deteriorating financial soundness for banks.

Many say Korea’s credit conditions will be tighter in the months to come, further exacerbating the downturn in business investment and household spending amid deeper growth challenges of the country.

NPLs are loans that are 90 days past due on its principal or interest payments. The classification indicates that the borrower is in default and the lender considers it unlikely that the loan will be fully repaid without taking action, such as seizing collateral.

According to financial market data, the country’s four leading banks — KB Kookmin, Shinhan, Hana and Woori — sold over 2 trillion won ($1.4 billion) in bad debt in the first half of this year, up 12.2 percent from a year earlier, in what industry watchers has termed a “panic selling.”

The collective sell-off comes amid rising NPL ratios. Financial Supervisory Service data showed the figure came to 0.59 percent in June, up from 0.53 percent a year earlier.

Over the same period, the banks’ NPL total stood at 16.6 trillion won, up more than 2 trillion won from a year earlier.

“The scale of defaults is growing. Banks have no choice but to clean up aggressively,” said an industry official. “The pressure would be greater for small- and medium-sized businesses and self-employed still reeling from postpandemic high borrowing costs, compounded further by weak consumption. This is expected to accelerate the bad debt offloading in the months to come.”

The continued uptick in bad debt is translating to NPL sales almost certain to exceed last year’s all-time high of 8 trillion won.

Banks will continue to offload bad debt to asset management firms and Korea Asset Management Corp., since direct management is costly and time-consuming.

The state-run entity specializing in recovery and restructuring of distressed debt helps bolster the lenders’ financial soundness.

KB is preparing to sell 300 billion won worth of bad debt in the fourth quarter. This will raise the lender’s disposed bad debt to about 830 billion won.

Woori plans to sell 400 billion worth of bad loans in the October-December period of this year. This is nearly equal to over 508 billion won sold off during the first six months of this year. Its annual sales will be close to 1 trillion won.

Shinhan is also seeking to offload 300 billion won in the remainder of this year.