Korean banks are tightening lending standards in the third quarter, primarily in the household sector, according to a Bank of Korea survey released on the 20th. The composite lending attitude index fell to -7 in Q3 from -2 in Q2, indicating stricter lending conditions. Banks cited rising credit risks in both corporate and household sectors as the main driver, with small and medium-sized enterprise delinquency rates climbing from 0.72% in December to 1.00% in May. Corporate bond rates also rose sharply, reaching 4.38% at the end of June from 3.46% at the start of the year, increasing borrowing costs for companies.
Korean Banks Tighten Household Lending in Q3
The Bank of Korea survey showed household lending attitudes tightened significantly, with the household housing index at -11 and household general lending at -14 in Q3. Both figures remained in negative territory, though slightly improved from Q2. Corporate lending attitudes moved to 0 from positive levels in the previous quarter, with both large enterprises and SMEs recording 0. The overall composite index of -7 reflected the combined effect of household sector tightening and the shift in corporate lending attitudes.
Banks Forecast Rising Credit Risk Across Sectors
Domestic banks expect corporate credit risk to increase in Q3, particularly among SMEs, due to persistent uncertainty in domestic and international business conditions including Middle East tensions. SME delinquency rates based on principal and interest overdue for one month or more rose from 0.72% in December to 0.81% in March and 1.00% in May. Household credit risk is also expected to grow due to concerns over vulnerable borrowers' debt repayment capacity.
Corporate and General Household Loan Demand Expected to Increase
Loan demand is projected to rise for both corporate and general household sectors. Corporate loan demand is expected to increase for both large enterprises and SMEs due to liquidity needs amid domestic and international uncertainties and the impact of rising corporate bond rates. AA- grade 3-year corporate bond rates increased from 3.46% at the start of the year to 4.38% at the end of June, raising financing costs for companies. General household loan demand is expected to grow due to living expenses and stock market investment needs. However, housing-related loans are forecast to decline due to regulatory tightening and rising interest rates.
FAQ
What did the Bank of Korea survey reveal about Q3 lending attitudes?
The Bank of Korea survey showed the composite lending attitude index fell to -7 in Q3 from -2 in Q2, indicating stricter lending standards. Household lending tightened significantly with housing at -11 and general lending at -14, while corporate lending attitudes moved to 0.
Why are Korean banks tightening lending standards?
Banks are tightening lending due to rising credit risks in both corporate and household sectors. SME delinquency rates increased from 0.72% in December to 1.00% in May, and corporate bond rates rose from 3.46% at the start of the year to 4.38% at the end of June, reflecting increased borrowing costs and financial stress.
