Difficulties in Borrowing Bank Money

As an increasing number of individuals and businesses could not repay their debts due to economic downturn, each bank is enhancing its limitation for bank loans.

As household debts are delayed and the small and medium-sized businesses` loan repayment becomes unreliable, commercial banks are prohibiting them from borrowing further money while concentrating on collecting delayed repayment money.

According to the financial sector on June 6, Kookmin Bank lowered its original target for a household debt increase this year from 12 to 13 percent to less than 8 percent. It also decided to lower corporate debt from 12 percent to 5 percent.

These decisions were made as banks found that debt repayment delays have been threatening soundness in the bank industry with the current debt delay rate for small and medium-sized businesses and households standing at 4 percent and 2.8 percent, respectively, as of late May. The figures are much higher than 3.74 percent and 2.7 percent in late March.

Kookmin Bank`s monthly loan increasing amount (for corporations and household loans) steadily climbed from 967.4 billion won in January, 910.6 billion won in February to 1 trillion and 663.9 billion won in May. The amount began to decrease in April to 821.5 billion won and 736.4 billion won in May.

Banks that have been scrambling to give loans to small and medium-sized businesses since the government decision to repress household debts last year are beginning to avoid corporate loans as well. This is because more and more small and medium-sized businesses cannot repay their debts as well as interest.

Woori Bank and Hana Bank reduced banks loans for small and medium-sized businesses by 30 percent and 57 percent from 1 trillion and 80 billion won and 350 billion won in April to 750 billion won and 150 billion won in May.

Woori Bank already stopped giving new loans for the service sector such as motels, restaurants and real estate agencies as their debt delay rate increased by 0.36 percent point from 2.94 percent in late April to 3.3 percent in May. It is also enhancing the loan process for other business sectors.

For household loans, they were expected to increase along with lowered call interest rates in May. However, as banks worried over possible hikes in the delay rate which have made the loan process difficult, the loan increase rate of some of those banks dropped rather than increased from the previous month.

Koomin Bank’s household debt increase in May stood at 672.2 billion won, a little up from 650.1 billion won in April. Woori Bank`s household debt went down a little from 514.2 billion won to 449.6 billion won. This avoidance of giving loans by banks is likely to continue for a while.

Dangerous Credit Rating Index surveyed by the Bank of Korea significantly went up from 26 in the first quarter to 44 in the second quarter. This shows that more bank loan authorities view that higher Dangerous Credit Rating Index means higher risks in giving loans.

Mirae Asset`s analyst Han Jung-tae said: “Bank loans have increased two digits every year since the foreign currency crisis, but as they turned around to a management-focused policy from a growth-focused one, the increase might stop at one digit this year.”

Chi-Young Shin higgledy@donga.com