Banks on alert over rising loan delinquency in construction industry
A view of Seoul, Tuesday / Yonhap
The default rate on construction-related loans is looming large for major banks in Korea, as lenders face increasing delinquency rates for on loans made to firms in the construction sector. Market watchers and financial authorities are closely monitoring the situation over concerns that an uncontrolled risk stemming from the cash-stripped real estate market might expand the scope of the crisis to the overall economy next year.
According to the financial industry, five major domestic banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — have witnessed both overdue payments and delinquency rates for their construction loans doubling within the year.
The total balance of funds lent to the construction industry has increased by 14 percent during the past year, from 20.3 trillion won at the end of last year to 23.2 trillion won at the end of last month. Yet, the increased total overdue amount and instances of delinquency well exceed the sheer growth rate of the loan balance itself.
As of the end of November, the overdue amount for construction loans from the top five banks reached 105.1 billion won ($81 million), which is about double the 52.4 billion won from the end of last year. The delinquency rate has also nearly doubled from 0.26 percent at the end of last year to 0.45 percent at the end of last month.
"The delinquency rate for construction loans is becoming noticeably higher than that of other industries," a market insider pointed out, adding that many construction companies are experiencing deteriorated cash flows due to persisting high interest rates, sluggish real estate market conditions, soaring raw material and labor costs, and more.
Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during a meeting of banks in central Seoul, Dec. 21. Yonhap
The upward trend in loan defaults is becoming a heightened concern for not only the lenders but also the government.
Real estate project financing businesses are particularly worrisome to the financial authorities. As real estate project financing involves borrowing a huge amount of capital in advance, staking the future value of a project, any suspensions or failures of such real estate development plans can easily lead to loan defaults.
Real estate project financing often involves the establishment of a special purpose corporation (SPC) to finance the needed capital, and the banking sector has separately compiled money lent to such SPCs as real estate project financing loans, in addition to construction loans. As of the end of November, the outstanding balance of real estate project financing loans from the top five banks stood at 18.2 trillion won, a 26 percent jump from the end of last year. Accordingly, construction companies involved directly or indirectly in real estate project financing projects are particularly said to be experiencing pressing cash flow problems from both construction loans and real estate project financing loans.
When the scope of lenders is expanded to include the secondary financial sector, such as savings banks and mutual cooperatives, real estate loan defaults are progressing even more rapidly, as they hold a higher percentage of bridge loans — short-term financing relying on high interest rates to be used temporarily. Bridge loans are widely used by the construction sector to finance the initial land acquisition costs.
The delinquency rate for real estate project financing loans across the entire domestic financial sector stood at 2.42 percent, an increase of 0.24 percentage points within just three months as of the end of the third quarter, while the delinquency rates have risen significantly at savings banks (4.61 percent to 5.56 percent), credit finance companies (3.89 percent to 4.44 percent) and mutual cooperatives (1.12 percent to 4.18 percent).
In response, the government has initiated an orderly cleanup, targeting real estate project financing businesses. While the approach has primarily been to extend loan maturities, anticipating a recovery in the real estate market next year, the prolonged period of high interest rates and real estate market downturn has prompted a more proactive stance towards structural adjustments.
"The keywords for real estate project financing are 'soft landing' and 'orderly cleanup.' Since last year, the government has been continuously supporting construction businesses, while it gradually begins addressing issues in problematic areas," FSC Chairman Kim Joo-hyun said during a meeting with banks earlier this month.