Debt, or credit, for both households and businesses surged to a historic peak, surpassing twice the gross domestic product (GDP) during the third quarter of this year. With an increasing number of businesses relying on non-banking institutions after the COVID-19 pandemic, coupled with a rising household delinquency rate, short-term financial market stability has deteriorated.
According to the financial stability report for the second half of the year released by the Bank of Korea (BOK) on Dec. 28, private credit relative to the nominal GDP reached an estimated 227 percent at the end of the third quarter and set a new record high. Private credit surpassed 200 percent in the first quarter of 2020, and it has consistently hovered around 220 percent since the first quarter of 2022. Although it dipped slightly to 224.5 percent in the first quarter of this year due to the continued impact of high interest rates since the second half of last year, it resumed an upward trend from the second quarter with 225.7 percent.
The steep increase in the ratio of private credit is primarily driven by corporate loans. The corporate credit ratio, a measure comparing corporate loans and bonds to nominal GDP, in the third quarter of this year reached a record high of 125.6 percent. This marks a significant increase of 22.7 percentage points compared to the end of 2019 when it was 101.3 percent before the onset of the COVID-19 pandemic. During the same period, advanced economies experienced a slight decrease from 89.9 percent to 88.8 percent, while emerging economies saw a modest increase of 4.9 percent. The corporate credit ratio has been on an upward trend for 23 consecutive months since the first quarter of 2018 when it was 93.2 percent.
In particular, corporate loans from the non-banking sector have experienced a significant surge since the onset of the COVID-19 pandemic. While loans from banks have increased by 41.7 percent, loans from non-banking financial companies have surged by 140.9 percent, specialized credit financial businesses by 71.4 percent, and savings banks by 65.9 percent. The proportion of loans from the non-banking sector has risen from 25.7 percent at the end of 2019 to 32.3 percent at the end of September this year.
With private credit on the rise, the financial stress index (FSI), which comprehensively reflects the short-term stability of the financial system, was calculated at 19.3, indicating a cautionary level, last month. This represents an increase for the fourth consecutive month since it dropped from 17.8 in May to 17.1 in July. Although it is lower than the 24.3 during the LegoLand crisis last year, the figure still exceeds the cautionary level of 12.
Household conditions are also unfavorable. Increased interest rates and other factors have led to a growing burden on borrowers, raising related credit risks. In the third quarter of this year, the delinquency rate for household loans rose to 0.89 percent, marking a 0.06 percentage point increase compared to the first quarter. Breaking it down by sector, banks saw an increase of 0.04 percentage points, reaching 0.35 percent, while non-banking financial institutions experienced a 0.15 percentage point rise, reaching 1.91 percent.
The loan amount for self-employed individuals has also reached an all-time high, expanding to 1,053 trillion won (US$816.91 billion) due to the impact of sluggish consumption and investment, marking a historic peak.
Notably, the proportion of vulnerable borrowers among self-employed individuals has increased, raising the risk of defaults. As of the end of September, the percentage of vulnerable borrowers among self-employed individuals, based on the number of borrowers, rose to 12.4 percent, or 389,000 individuals, showing a 1.4 percentage point increase compared to the end of the previous year. In terms of outstanding loan balances, it also increased by 1.2 percentage points to 11 percent, or 116.2 trillion won. Consequently, the proportion of overdue borrowers among the total loans held by self-employed individuals rose to 2.47 percent at the end of September, a 1.13 percentage point increase from the end of the previous year when it was 1.35 percent.
However, the BOK assesses that the flow of household loans remains stable. This is because, among newly processed household loans, the proportion of loans to high-income borrowers with sound repayment capabilities increased from 55.7 percent in the first quarter to 61.6 percent in the second to third quarters. In contrast, the proportion of loans to low-income borrowers decreased from 11.4 percent to 9.3 percent during the same period.