Default Rate Rising Among Financial Institutions

With the economy slipping into a deeper downturn, more companies and individuals are going under, translating into a soaring loan default rates for banks.

The Bank of Korea yesterday said the dishonored bill ratio in South Chungcheong Province soared to 1.1 percent in September and October, the highest level since 2.06 percent in August 2001. The ratio on Jeju Island also jumped to 1.4 percent, exceeding 0.87 percent at the peak of the Asian financial crisis in December 1997.

A central bank official said, “We remain on high alert as the dishonored bill ratio has rapidly increased in certain provinces.”

The number of companies and individuals filing for bankruptcy protection has also risen quickly.

According to the Seoul District Court, the number of corporate court receivership applications reached 87 between January and last month, up from 29 for all of last year.

Individual bankruptcy filings are also on the rise, with the number reaching 99,218 between January and October. This means the number of individual bankruptcy filings is expected to exceed 100,000 for three consecutive years.

With the bankruptcy rate spiraling upward, financial institutions are struggling hard to stem the rise in the default rate.

According to the Financial Supervisory Service, the average default rate on loans extended by domestic banks rose from 0.7 percent in June to 0.9 percent in September to 1.0 percent in October. The default rate on domestic currency loans excluding those for foreign currency also rose sharply from 0.74 percent at the end of last year to 0.79 percent in June to 0.97 percent in September.

Amid the growing fear of bankruptcy among the small and medium-size companies after the collapse of Shinsung Engineering & Construction and C& Group, domestic banks are eager to protect themselves.

Shinhan Bank President Shin Sang-hun urged his bank tellers to prevent a rise in loan defaults in a recent meeting, saying, “From the fourth quarter, every industry will see a rapid increase in the default rate, which is cause for great concern in bank soundness.”

Hana Bank President Kim Jung-tae also said, “A downturn in the real economy is expected down the road. I urge you to make all-out efforts to prevent the default rate from rising in December.”

An official from the Financial Supervisory Service said, “Since banks try to closely manage their default rates usually at the end of a quarter or year, the ratio tends to rise in October and November but falls in December. This year will be different, however, with the economy spiraling down. We expect the gross default rate of domestic banks to surpass one percent by year’s end,”

The situation at non-banking financial institutions is more serious.

The default rate at savings banks in September was 16 percent, up two percentage points from June. Loan defaults of real estate project financing soared to a record high from 14.3 percent to 17 percent over the same period.

The ratio of loan defaults of cash-strapped capital companies offering leasing also surged from 2.8 percent at the end of last year to 3.7 percent in September.

jaeyuna@donga.com