South Korea's four largest financial groups reported a sharp 28% surge in non-performing loans last quarter, totaling 12.5 trillion won ($9.2 billion), undermining the government's ambitious "inclusive finance" campaign aimed at broadening credit access for underserved borrowers. KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group disclosed the figures amid growing concerns over deteriorating asset quality, even as economic growth slowed to 1.8% in 2025.
The spike in bad loans, primarily from small and medium-sized enterprises (SMEs) and low-income households, contrasts sharply with the 2023 launch of the inclusive finance drive, which mandated banks to allocate at least 30% of new lending to vulnerable sectors. Regulators had hoped the initiative would stimulate consumption and support post-pandemic recovery, but delinquency rates have climbed to 2.1%—the highest since the 2008 financial crisis—driven by high interest rates and weakening export demand in key industries like semiconductors and shipbuilding.
Financial authorities attribute much of the surge to overly aggressive lending practices under pressure to meet inclusion quotas. "Banks chased volume over prudence, extending loans to high-risk borrowers without adequate credit assessments," said Kim Soo-hyun, a senior analyst at the Financial Supervisory Service. Shinhan, for instance, saw its bad loans balloon by 35% to 3.8 trillion won, largely from real estate-backed SME financing that soured amid a property market slump.
The trend has prompted swift regulatory backlash, with the Financial Services Commission announcing stricter stress tests and caps on high-risk lending for 2026. Hana Financial Group's CEO, Ju Yong-bae, warned in a recent earnings call that further deterioration could erode capital buffers, potentially necessitating government bailouts reminiscent of the 1997 Asian financial crisis. Yet, some experts argue the inclusive finance push remains vital, urging better risk management rather than retreat.
As South Korea grapples with household debt exceeding 100% of GDP, the bad loan crisis underscores the perils of balancing financial inclusion with stability. Policymakers now face a delicate choice: double down on reforms to protect vulnerable groups or tighten credit to safeguard the banking sector, with ripple effects likely felt across Asia's fourth-largest economy.
