Regional Banks Squeezed by Delinquency Rates... Shortage of Tech Firms Hampers Productive Finance

Regional banks are facing a double whammy of rising delinquency rates due to prolonged high interest rates and a sluggish local economy. According to the financial sector, as of the end of June, lending to technology companies by five regional banks increased by only 3.7% year-on-year, remaining at half the level of the major banking sector (which rose 8.7%). During the same period, the average delinquency rate for regional banks jumped by 0.14 percentage points to 1.33%.

Technology-based credit loans are a representative 'productive finance' product designed to supply funds to SMEs that possess excellent technology but lack collateral or financial track records. They were introduced in 2014 to supply funds to innovative SMEs. Following regulations on household lending, the Industrial Bank of Korea (IBK) and the four major commercial banks have been expanding supply and leading the market.

The outstanding balance of technology-based credit loans at the five regional banks—Gyeongnam, Gwangju, Busan, Jeonbuk, and Jeju—increased by only 3.7% year-on-year to 18.505 trillion won. This figure falls short of even half of the overall banking sector's growth rate and is smaller in scale than the balance of a single major commercial bank. Gyeongnam Bank and Gwangju Bank saw their balances decrease by 1.0% and 4.3% respectively year-on-year, while Busan Bank saw a 9.5% increase, recording a balance in the 8 trillion won range.

In contrast, IBK’s technology-based credit loan balance stood at 139.6211 trillion won, up 11.8% from the same period last year. IBK’s loan increase of 14.6834 trillion won was more than 20 times the combined increase of the five regional banks. Additionally, the technology-based credit loan balances of the four major commercial banks—KB Kookmin, Shinhan, Hana, and Woori—increased by 7.7% year-on-year.

As regional economic downturn, high interest rates, and high exchange rates persist, the financial conditions of local manufacturers and SMEs have deteriorated, consequently worsening the asset soundness of regional banks, which have a high proportion of corporate loans. The average delinquency rate of the five regional banks at the end of June this year worsened by 0.14%p year-on-year to 1.33%. An official from a regional bank diagnosed the situation as a decline in the number of sound SMEs coupled with increasing burdens regarding the soundness of existing loans. The official added that it is difficult to readily comply with the government's calls for productive finance, as there are fewer companies eligible for tech financing outside the Seoul metropolitan area, and this is compounded by the burden of delinquencies.