Banks expect smaller firms` credit risks to soar

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SEOUL, Jan. 6 (Yonhap) -- Local lenders expect credit risks for smaller firms to
reach a 10-year high in the first quarter as the slumping economy is feared to
result in more bad loans, the central bank said Tuesday.
The index gauging smaller firms' credit risks, the likelihood of borrowers not
repaying a loan or debt, reached 59 in the January-March period, up from 56 in
the fourth quarter of 2008, according to a survey of 16 lenders by the Bank of
Korea (BOK).
The first-quarter figure marked the highest level since the first quarter of 1999
when the BOK began to compile related data.
"Amid the slumping economy, local banks forecast that more companies will post
weaker earnings," a BOK official said.
Credit risks for households are also expected to be on the upward trend. The
index measuring credit risks for households came in at 31 in the current quarter,
compared with 25 in the fourth quarter, fanning fears over their declining
capacity to repay debt. The figure also marked the highest point since the third
quarter of 2003 when the index reached 44, the central bank said.
According to the financial watchdog, the loan default rate by companies and
households hit a three-year high in November. The ratio stood at 1.18 percent at
the end of November, compared with 1.14 percent a month ago, adding to worries
over lenders' soundness.
Meanwhile, local banks are forecast to ease their grip on lending to smaller
companies in the first quarter, in line with government efforts to increase the
liquidity supply.
The index gauging local banks' lending behavior to small and medium enterprises
was minus 16 for the January-March period, compared with minus 26 for the fourth
quarter of 2008, the BOK said.
The lower the reading, the more likely it is that banks will tighten their
restrictions on lending.
"On the back of government policies to supply liquidity to companies, local banks
are forecast to ease restrictions on loans to relatively healthy smaller firms,"
a BOK official said.
South Korean lenders have been increasingly reluctant to lend money to companies
and households as the deepening economic slump and a credit crunch are increasing
the amount of bad debt. They are struggling to bolster falling capital adequacy
ratios, a key barometer of financial soundness that measures the percentage of a
bank's capital to its risk-weighted credit.
The government and the financial watchdog have urged local banks to increase
their capital base, which would help them increase lending to cash-strapped
companies and households.
sooyeon@yna.co.kr
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