South Korea's four largest financial groups—KB Financial Group, Shinhan Financial Group, Hana Financial Group, and NH Financial Group—reported a sharp increase in non-performing loans (NPLs) in the third quarter, reaching a combined 12.5 trillion won ($9.2 billion), up 28% from the previous year. This surge coincides with the government's aggressive "inclusive finance" initiative, launched in 2023 to expand credit access for underserved borrowers such as self-employed individuals, small businesses, and low-income households. Bank executives warn that the policy's emphasis on lending quotas has exposed institutions to heightened credit risks amid a slowing economy.
The inclusive finance drive, spearheaded by the Financial Services Commission (FSC), mandates financial groups to allocate a significant portion of their loan portfolios—up to 20% in some cases—to high-risk segments previously deemed unbankable. KB Financial, the nation's largest lender by assets, saw its NPL ratio climb to 0.85% from 0.62% a year earlier, with self-employed loans accounting for 40% of new delinquencies. Shinhan and Hana followed suit, with NPLs in their small business portfolios ballooning by 35% and 42%, respectively, as borrowers grapple with rising interest rates now hovering at 3.75% and stagnant wage growth.
Regulators defend the program as essential for reducing financial inequality in a country where household debt exceeds 100% of GDP. FSC Vice Chairman Shin Sang-ho stated during a recent briefing that "inclusive finance is not just a policy—it's a societal imperative," pointing to a 15% uptick in loan approvals for micro-entrepreneurs since inception. However, critics, including the Bank of Korea, highlight that the push has eroded underwriting standards, with approval rates for subprime borrowers jumping from 25% to 55% over two years. Independent analysts from Korea Ratings estimate that without stricter risk controls, NPLs could double by mid-2026 if economic headwinds persist.
The ripple effects are already evident in the stock market, where shares of the four groups dipped an average of 4% following the earnings disclosures. Hana Financial's CEO, Ham Young-joo, acknowledged in an earnings call that "we've had to balance policy compliance with prudence, but the volume of risky loans has inevitably risen." Meanwhile, fintech platforms like KakaoBank, which have aggressively pursued similar demographics, reported even steeper NPL growth at 1.2%, underscoring broader vulnerabilities in Korea's retail lending sector.
Looking ahead, the Finance Ministry is mulling adjustments to the inclusive finance framework, potentially introducing loan-loss provisioning buffers and AI-driven risk assessments to mitigate future surges. Yet, with presidential elections looming in 2027, political pressure to maintain the program's momentum remains intense. Economists caution that while the initiative addresses long-term inclusion goals, its short-term costs could strain bank capital adequacy ratios, already hovering near regulatory minimums, and exacerbate South Korea's chronic household debt crisis.
