Pain of a non-performing loan spells profit to some

Finance

Published: 18 Apr. 2022, 16:27 Updated: 18 Apr. 2022, 16:37

Pain of a non-performing loan spells profit to some

Stores that closed in Myeong-dong in central Seoul on Dec. 21 last year. [NEWS1]

Nonperforming loans are expected to grow in the second half of the year and companies are preparing to snap them up at a discount.

A nonperforming loan (NPL) is a loan in which the borrower has not made any scheduled payments of principal or interest for at least 90 days. Banks sell NPLs at significant discounts to other banks or investors in auctions.

NPL owned by banks totaled 3 trillion won ($2.5 billion) last year, down 32 percent from 4.4 trillion won in 2019, or right before the Covid-19 outbreak. Low interest rates since the pandemic, which were brought down to a record low of 0.5 percent, and government relief loans for small businesses hurt by the pandemic helped bring down total outstanding NPLs last year.

But as interest rates rise and the government tapers off its support for small merchants, financial companies are anticipating opportunities to buy NPLs at a cheap price.

In January, Woori Financial Group established Woori Financial F&I (Financial & Investment), which will invest in non-performing loans. In 2014, it sold an NPL-investing company to Daishin Securities. The company said it believes the NPL market will grow following the Covid-19 pandemic.

Hana Financial Group’s Hana F&I recently created an online platform on which information on NPLs can be shared in real time. Kiwoom Securities, which established Kiwoom F&I late 2020 with 20 billion won in capital, raised its capital to 110 billion won as of December through issuance of new shares.

Government programs that extended loan payback dates for small businesses end in September. Loans covered by these programs totaled 133.4 trillion won as of the end of January.

Korea's base interest rate was raised to 1.5 percent last week in the fourth round of a tightening that began in August 2021. Analysts project two more rate increases by a quarter percentage point this year.

“There could be a rise in [individual merchants] that face default once the government support programs end,” said a spokesperson for Uamco, the largest NPL company. After the government programs end in September, if small businesses aren't able to pay loans back in 90 days, or by December, the loans will become non-performing.

In 2020, the proportion of troubled businesses out of all companies subject to outside auditing was 15.3 percent, up 0.5 percentage points from a year earlier, according to the central bank. That was the highest rate since 2010.

"The number of troubled businesses could jump when the government relief programs related to Covid-19 end," said Ahn Dong-hyun, a financial economics professor at Seoul National University. Banks should “categorize businesses that will be able to survive and those that won’t."

BY YEOM JI-HYEON, JIN MIN-JI [jin.minji@joongang.co.kr]