Mounting SME Loan Defaults Threaten Bank Stability

South Korean banks are facing a growing crisis as small and medium-sized enterprises (SMEs) struggle under the weight of high costs and a slowing economy. This has led to a meaningful increase in loan defaults, raising concerns about the financial health of major banking institutions.

Soaring SME loan Volumes and Delinquency Rates

The combined SME loan portfolio (including loans to individual business owners) of the five largest South Korean banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup – reached ₩663.922 trillion by the end of March 2025. This represents an increase of approximately ₩23 trillion compared to March 2024.

However, this growth in lending has been accompanied by a worrying rise in delinquency rates.Data from the financial Supervisory Service indicates that the SME loan delinquency rate stood at 0.77% at the end of March 2025,a 0.15 percentage point increase from the previous month.This figure is nearly double the rate of 0.39% recorded in January 2023, highlighting the rapid deterioration in loan quality.

Deteriorating Loan Quality and the Rise of “Can Loans”

The quality of bank loans has also suffered, with non-performing loans at the five major banks exceeding ₩5.58 trillion by the end of last year, an increase of over ₩1 trillion in just one year. This follows a 24% increase in non-performing loans in 2023, reaching ₩4.4943 trillion.

A especially concerning trend is the rise of so-called can loans, where borrowers are unable to make interest payments. These loans at the five major banks totaled ₩4.37 trillion at the end of last year, a 24.2% increase from the end of 2023. These non-income generating assets further strain bank profitability and increase the risk of financial instability.

Banks Respond with Stricter Lending and Bad Debt Sales

Faced with increasing bad debts, banks are taking steps to strengthen credit risk management. This includes raising lending thresholds, making it more difficult for companies with lower credit ratings to secure loans. Some banks are also actively selling off bad debts to reduce their exposure.

For example, Hana Bank has begun to tighten credit assessments, particularly in sectors perceived as high-risk, such as the secondary battery industry. KB Kookmin Bank is planning to sell ₩600 billion in bad debts in the first half of this year.

We have felt the seriousness of the delinquency rate of small and medium -sized business loans since last year.

An official from a major South Korean bank

Economic Headwinds and Future Outlook

The current situation is exacerbated by a combination of factors, including sluggish domestic demand, increased exchange rate volatility, and ongoing global trade tensions. These economic headwinds are expected to further strain SMEs and increase the likelihood of loan defaults.

At the beginning of this year, the delinquency rate rose in January, and the delinquency rate of SME loans was 0.77%in January.

Park Hye -jin, a researcher at Daishin Securities

As banks finalize their first-quarter settlements in April, lending standards are expected to become even more stringent, potentially creating a credit crunch for struggling businesses. The long-term impact of this SME loan crisis on the South Korean banking sector remains to be seen, but it is clear that proactive measures are needed to mitigate the risks and support the stability of the financial system.