SEOUL, South Korea – South Korea is grappling with a rapidly escalating debt crisis as an increasing number of households and self-employed individuals struggle to repay their loans. Key indicators of loan delinquency have reached their highest levels in 11 years, signaling a deepening economic downturn and raising concerns about the stability of the financial sector.

According to figures released by financial institutions on Monday, the average delinquency rate (loans overdue by one month or more) for won-denominated loans at the nation's top five banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—climbed to 0.49% at the end of May. This represents a 0.05 percentage point increase from April's 0.44% and a significant 0.14 percentage point jump since December 2024, when the rate stood at 0.35%.

The sharp rise in delinquencies is particularly pronounced among self-employed individuals and small business owners, who are bearing the brunt of the severe domestic demand slump. The delinquency rate for personal business loans at the five major banks averaged 0.67% at the end of May, up 0.06 percentage points in a single month and a substantial 0.19 percentage point increase from 0.48% at the end of last year. Household loan delinquency rates also rose, reaching 0.36% last month, a 0.07 percentage point increase from the end of 2024.

 
Non-Performing Loans (NPLs) Show Alarming Growth

The pace of increase in Non-Performing Loan (NPL) ratios, which represent loans overdue by three months or more, is also accelerating. Excluding Woori Bank, which has yet to finalize its May figures, the average NPL ratio for total won-denominated loans at the remaining four major banks reached 0.45% at the end of May. This is a 0.12 percentage point surge since the end of last year, when the ratio was 0.33%. Notably, small and medium-sized enterprises (SMEs) experienced the largest increase in NPL ratios, rising by 0.16 percentage points to 0.65% from the end of 2024.

These troubling statistics indicate that the risk indicators for household, personal business, and corporate loans have reached their highest levels since the mid-2010s. For one major bank (Bank A), the personal business loan delinquency rate of 0.56% and NPL ratio of 0.49% at the end of May are the highest since June 2014 (0.59%) and September 2014 (0.54%), respectively. The household loan delinquency rate of 0.33% is also the highest since June 2014 (0.34%), and the SME delinquency rate of 0.61% is the highest since September 2014 (0.68%).

 
Economic Headwinds and Future Outlook

In response to the deteriorating asset quality, banks are intensifying their soundness management efforts, including the activation of special task forces for delinquency management. However, experts warn that a swift stabilization of delinquency rates is unlikely given the prolonged domestic demand slump and heightened internal and external uncertainties.

Jeong Se-eun, a professor of economics at Chungnam National University, expressed concern about the future economic trajectory. "The number of self-employed individuals in difficult situations is likely to increase further," she stated. "If raw material prices rise due to risks originating from the Middle East, leading to higher inflation, the economy could worsen in the second half of this year." Professor Jeong emphasized that the immediate challenge is to manage delinquency rates to prevent further deterioration.

The current economic climate in South Korea is marked by several challenges. High interest rates, a global economic slowdown impacting exports, and persistent inflation are all contributing to the financial strain on households and businesses. The Bank of Korea has maintained a hawkish stance on interest rates to combat inflation, which, while necessary, adds pressure on borrowers. Furthermore, geopolitical tensions and supply chain disruptions continue to pose risks to the South Korean economy, a nation heavily reliant on international trade. The government has introduced measures to support small businesses and vulnerable households, but the effectiveness and scale of these interventions in mitigating the widespread debt burden remain to be seen. The coming months will be critical in determining whether South Korea can navigate this deepening debt crisis without significant repercussions for its financial stability.