Banks expect household credit risk to soar in Q2

SEOUL, April 6 (Yonhap) -- Local lenders expect credit risks for households to reach the highest level in more than five years in the second quarter as the slumping economy hampers their ability to repay debt, the central bank said Monday.

The index gauging households' credit risks, or the likelihood of borrowers not
paying back debt, reached 31 in the April-June period, up from 25 in the first
quarter of this year, according to a survey of 16 lenders by the Bank of Korea
(BOK).
The second-quarter figure marked the highest level since the fourth quarter of
2003 when the index came in at 32, it added.
"The slumping economy is aggravating job market conditions and eroding household
income. Local banks forecast that households' credit risks will rise in the
current quarter amid falling asset prices," said Shin Sung-hwan, an official at
the BOK.
The data comes as the South Korean economy shrank 5.1 percent in the fourth
quarter from three months earlier, the worst performance in 11 years, due to
tumbling exports and weak domestic demand. The country's jobless rate jumped to a
four-year high of 3.9 percent in February with over 140,000 jobs eliminated from
payrolls compared with a year earlier. The job loss is the steepest since
September 2003.
Credit risks for smaller firms are expected to remain at a high level. The index
measuring their credit risks remained unchanged at 47 in the second quarter as
loan default rates rise and a corporate revamp drive is feared to increase
distressed loans.
Meanwhile, local banks are forecast to ease their grip on lending to such
companies in the second quarter despite caution against still-high credit risks,
in line with the government's efforts to increase liquidity.
The index gauging local banks' lending behavior for small and medium enterprises
(SMEs) reached 3 for the current quarter, compared with minus 2 for the first
quarter, the BOK said.
A lower reading indicates that banks will tighten their restrictions on lending.
"Amid the government's call for expanding loans to SMEs, local banks are
projected to ease restrictions on loans to relatively healthy smaller firms.
Meanwhile, they are expected to tighten their grip on lending to larger
companies," Shin said.
South Korean lenders have been increasingly reluctant to lend money to smaller
companies and households as problem loans pile up amid the deepening economic
slump and a credit crunch, compromising their financial health.
Local lenders have begun to receive new capital by tapping a 20 trillion won
(US$15.2 billion) bank capitalization fund designed to encourage them to expand
lending to cash-strapped companies and households.