The Shadow of Improved Earnings: The 'Illusionary Boom' and Rising Delinquencies in Secondary Banking

According to a report by Maeil Business Newspaper, South Korea's savings banks and mutual finance cooperatives posted seemingly robust earnings in the first half of the year. However, beneath this surface-level recovery lies a troubling resurgence in delinquency rates, signaling deteriorating asset quality. As the prolonged high-interest-rate environment and real estate slump continue to squeeze low-income borrowers, financial authorities and institutions are urged to look past the temporary earnings illusion and brace for potential credit risks.

The Crack in Soundness Hidden Behind Earnings Recovery

The Paradox of Surface-Level Earnings and Rising Delinquencies

According to recent financial indicators, South Korea's savings banks and mutual finance cooperatives recorded relatively favorable operating results in the first half of this year. As reported by the Maeil Business Newspaper, this performance was largely driven by asset portfolio adjustments and cost-cutting efforts. However, market experts warn against taking these figures at face value. Before the joy of improved earnings could settle, delinquency rates—a core metric of financial soundness—began climbing once again.

This phenomenon is interpreted as a classic 'illusionary effect.' While new lending has slowed due to tighter regulations and conservative credit management, the expiration of interest payment deferrals and the exhausted repayment capacity of marginal borrowers have led to an increase in outstanding delinquent loans. In short, with the denominator (total loans) stagnating or shrinking and the numerator (delinquent loans) rising, delinquency rates are deteriorating rapidly.

The Cumulative Impact of High Interest Rates and Real Estate PF Risks

The biggest Achilles' heel dragging down the secondary banking sector is undoubtedly the prolonged high-interest-rate environment and real estate Project Financing (PF) loans. Real estate-related loans, which were aggressively expanded over the past few years, have turned sour amid the property market slump, intensifying the pressure to accumulate bad debt provisions. Although operating profits in the first half partially offset the burden of provisioning, these institutions are highly likely to face a severe test of their loss-absorption capacity once restructuring of real estate project sites begins in earnest.

Weakening Resilience of Marginal Borrowers and Macroeconomic Implications

Credit Risk Migration in the Non-Monetary Financial Sector

Savings banks and mutual finance cooperatives are representative non-monetary financial institutions primarily used by low-income households and small business owners who cannot clear the high hurdles of commercial banks. Therefore, the rise in delinquency rates at these institutions is not merely an isolated issue for individual firms, but a signal that the weakest links in the real economy are fracturing. As the domestic economic slowdown persists and the double whammy of high inflation and high interest rates continues, the repayment capacity of self-employed individuals and multiple-debt holders is deteriorating sharply, directly migrating into credit risks for secondary financial institutions.

Financial authorities are also viewing this situation with gravity. Although they are encouraging the sale of non-performing loans (NPLs) to curb the rising delinquency rates, structural limitations exist as high discount rates in the market make financial institutions hesitant to sell. Ultimately, there is no clear breakthrough other than strictly classifying asset quality and proactively securing capital to prepare for potential credit shocks.

Conclusion: A Call for Proactive Risk Management

The robust earnings of the first half are far from enough to provide reassurance that the secondary banking sector has passed the worst of the storm. Instead, the resurgence of delinquency rates may be a precursor to upcoming credit risks. Rather than becoming complacent with short-term profit figures, financial institutions must make every effort to manage risks by tightening credit screening and swiftly cleaning up non-performing assets.

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