Financial system remains stable despite burden of rising debts

South Korea's financial system remains relatively stable, but debt payment burden and asset deterioration may increase amid extended monetary tightening, a central bank report showed yesterday.

In its report on financial stability, the Bank of Korea (BOK) said despite woes over a possible rise in soured property development-related loans and rising debt payments, the country's financial system remains good on the back of a recovery in the financial market and a slowdown in household debt.

But the central bank warned that the possibility of more property development-related loans turning sour, a rebound in debt payment burdens and increased debt leverage could inflate risks and deteriorate asset quality of financial institutions.

Against these backdrops, the central bank said the authorities need to tighten the management of risks against a potential resurgence of property-related loan deterioration, and increased debt payment burden by households and companies.

More specifically, authorities are urged to take measures for the soft landing of the property development market.

The BOK also said financial institutions need to strengthen their asset soundness by sorting out more bad loans and putting aside more loan-loss reserves.

Real estate project financing loans have become a major risk factor of the financial sector amid a prolonged slump in the property market due to price hikes.

According to data from the Financial Supervisory Service, the delinquency ratio on real estate project financing loans had come to 2.70 per cent as of end-december, up 0.28 percentage point from 2.42 per cent three months earlier.

The total value of outstanding loans climbed to 135.6 trillion won (US$102 billion) from 134.3 trillion won over the cited period, the data showed.