The increasing number of construction companies unable to repay debts on time is leading the arrears rate for construction loans from savings banks to approach 20%. This is a result of prolonged stagnation in the construction and real estate sectors due to deteriorating construction conditions and the fallout from troubled real estate project financing.
According to data submitted by the Bank of Korea to Democratic Party lawmaker O Ki-hyeong on the 18th, the arrears rate for construction loans from savings banks stood at 18.21% at the end of the third quarter of last year, based on a standard of 1 day or more for principal or 1 month or more for interest arrears. It increased by 7.07 percentage points from 11.14% at the end of 2023, and compared to 2.13% at the end of 2022, the arrears rate has surged ninefold over two years.
The rise in the arrears rate is also sharply evident in the mutual finance sector. The arrears rate for construction loans from mutual finance entities, including NongHyup, Suhyup, and Shinhyup (excluding Saemaul Geumgo), jumped from 3.34% at the end of 2022 to 5.87% at the end of 2023 and further to 10.93% at the end of the third quarter last year. It is reported that the arrears rate for Saemaul Geumgo, which is excluded from the tally, is also in the 10% range.
The rise in the arrears rate for construction loans results from the increasing number of 'marginal corporations.' Half of domestic construction companies are in a state where they cannot even repay loan interest with the money they earn. According to a report titled '2023 Analysis of the Management Performance and Marginal Corporations of Construction External Audit Corporations' published by the Korea Construction Policy Institute last month, it was found that among the 2,292 construction companies undergoing audits by external accounting firms, 47.5% (1,089 companies) have an interest coverage ratio of less than 1. An interest coverage ratio of less than 1 means that the corporation cannot cover its interest expenses with its earnings.
With rising raw material prices and labor costs, construction costs continue to rise while the amount of new construction starts declines, indicating a deterioration in profitability for construction companies. It is also difficult to avoid a chain of defaults arising from real estate project financing. Construction companies are directly or indirectly participating in project financing by providing guarantees when project implementers borrow money from financial institutions or taking on responsibility for completion. The arrears rate for real estate loans, including loans for real estate project financing, is also rapidly increasing. At the end of the third quarter of last year, the arrears rate for real estate loans was 15.95% for savings banks and 9.00% for mutual finance, representing an increase of 8.8 percentage points and 3.69 percentage points, respectively, compared to the previous year. Compared to two years ago, this is a twelvefold and threefold increase.
While the consensus is that the shock from the construction and real estate sectors is unlikely to spill over to financial institutions, there are voices expressing that it is not a cause for complacency. The Financial Supervisory Service has been working since last year to identify troubled savings banks. This effort aims to preemptively block the transmission of distress through proactive restructuring and management improvements. Currently, six to seven savings banks are facing a review by financial authorities for timely corrective measures. Timely corrective measures refer to actions demanded by financial authorities, such as stock cancellation, mergers, or business suspensions, when the soundness of financial companies like savings banks deteriorates below certain standards.