Looming crisis of recession

The delinquency rate for loans in the second-tier financial sector, including credit card companies and savings banks, the main lenders for low-income households, recorded a ten-year high, signaling an economic crisis. This means a sharp rise in small independent businesses and economically vulnerable groups unable to repay their debts on time due to a serious decline in domestic consumption, high inflation, and high interest rates. Stimulating domestic demand is urgently needed to prevent the working-class economy from being pushed to the brink, but practical measures, including the supplementary budget, are yet to come.

The delinquency rate of credit card companies stood at 1.65% as of the end of 2024, the highest in a decade since 2014, according to the Financial Supervisory Service. The total amount of card loans and cash advances, in particular, soared to a three-year high, with their related delinquency rate jumping up to 3.38%. As the bar for taking loans from the first-tier banks got higher in 2024, low-credit groups, including small independent business owners and SMEs, flocked to credit card companies for emergency funds. Yet, many still failed to repay their debts. The interest rates for card loans and cash advances range between 14 and 18% on the annual average, raising concerns that they may turn into insolvent ticking bombs.

Similarly, the late payment rate for savings banks was 8.52% as of the end of 2024, the highest since 2015. The rate for serious delinquencies, meaning loans overdue for more than three months, approached as high as 11%. These are attributed to weakening household and corporate repayment capacity due to sluggish local demands and worsening real estate project financing (PF) situation. Savings banks that have provided PF loans to small-to-medium-sized construction companies recorded losses of 400 billion Korean won in 2024, marking their second consecutive year of deficits.

What's more concerning is that delinquencies of the second-tier financial institutions may worsen further as weak domestic demand persists due to the aftermath of martial law and impeachment. Analysis shows that card revenues for January have dropped even in the area of educational expenses, the "last line of defense" in household spending. Over the past three months alone, 270,000 self-employed individuals have shut down their businesses. The construction industry, a key driver of domestic demand, is facing mounting fears of cascading bankruptcies as mid-tier construction firms have begun filing for court receivership since the start of the year.

If the financial instability in the secondary financial sector worsens, there is a real risk of repeating past crises such as the 2003 "Card Crisis," caused by reckless credit card lending, or the 2011 "Savings Bank Crisis," triggered by PF loan defaults that led to a wave of savings bank failures. To prevent the collapse of the debt-burdened working-class economy, it is crucial to swiftly implement a supplementary budget to tackle the most urgent risks. Additionally, structural reforms must be carried out alongside measures to reduce the total debt burden, ensuring that loan defaults among vulnerable groups do not spread across the entire financial system.