Bad loans feared to rise along with household debt

Foreign investment banks (IBs) have warned that domestic banks could see their loan delinquency rates rise this year due to the increased possibility of household defaults on their debts, data showed yesterday.

Bank of America Merrill Lynch and other major global IBs expect the uptrend in Korean banks’ loan delinquency rate, which started during the second half of last year, to gain further ground in 2012, according to data by the Korea Center for International Finance.

The overall delinquency rate of bank loans to companies and households reached 1.43 percent as of the end of November, up 0.15 percentage point from the previous month and the highest level in 15 months.

The loan default rate for December could drop thanks to bank efforts to write off bad loans for year-end settlements, but the figure is feared to shift upward in January, the foreign IBs said.

The Financial Supervisory Service, the nation’s financial watchdog, has yet to announce its tally on the December bank loan delinquency rate, which covers loans that are overdue for more than one day.

According to the center, Bank of America Merrill Lynch has warned that more households, which spend nearly 20 percent of their disposable income on debt repayments, could fail to service their debts in the coming months amid growing signs of an economic slowdown.

Local banks’ household loans, including home-backed and credit loans, reached 455 trillion won ($398 billion) as of the end of December, up 1.8 trillion won from the previous month, according to the Bank of Korea.

The Royal Bank of Scotland has issued a warning against a possible rise in the delinquency rate of loans extended to small and medium enterprises, which usually bear the brunt of an economic slump, according to the data.

“Foreign IBs seem to have raised red flags as they expect more households to default on their debts,” said Lee Sang-won, a researcher at the center. Yonhap