Regional banks see delinquency rates rise as economic polarization deepens

Busan Bank, a major regional lender in southeastern Korea / Courtesy of Busan Bank

Commercial banks that serve customers primarily in provincial areas are facing rising delinquency rates, as more borrowers fall behind on past due loan payments amid deepening economic divides.

The challenging business environment for these regional lenders is in stark contrast with larger banks based in the Seoul metropolitan area, as well as fast-growing internet-only banks.

Data compiled by four major regional lenders — Busan Bank, Kyongnam Bank, Jeonbuk Bank and Kwangju Bank — reported an average delinquency rate of 1.07 percent for the first half of the year.

The rate rose from 0.61 percent from a year earlier, exceeding the 0.34 percent average recorded by the country’s four largest commercial banks operating nationwide — KB Kookmin, Shinhan, Hana and Woori.

The 1 percent rate is widely considered the psychological red line for banking stability, industry officials said Wednesday.

They said the breach reflects growing pressure on regional economies, where small and medium-sized enterprises (SMEs) and self-employed borrowers, the backbone of local lending, are increasingly struggling to repay debts amid unbalanced economic growth.

Of the 143.58 trillion won ($102.9 billion) in total outstanding loan balance at the four regional banks, 64.3 percent was extended to businesses.

Nearly 90 percent of those business loans went to SMEs or sole proprietors.

“While Seoul and the greater capital area continue to attract investment and talent, many provincial areas face declining populations, sluggish business activity and contracting real estate markets,” an industry official said. “This economic divide is directly affecting the credit quality of regional bank customers.”

Another industry official said, “With consumer spending weakening and input costs rising, many of these borrowers are unable to keep up with repayments, pushing delinquency rates to worrying levels.”

The officials also pointed to deteriorating profitability.

In the first half of 2025, Busan Bank, Kyongnam Bank, Jeonbuk Bank and Kwangju Bank posted a combined net profit of 675.2 billion won.

In contrast, KB Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank reported over 8 trillion won in profits for the same period — marking a more than 10-fold gap.

Even internet-only banks, once considered underdogs, are closing in.

The nation’s three digital lenders — KakaoBank, Kbank and Toss Bank — recorded a combined 388.3 billion won in net profit over the same period, their best performance to date.

To help regional lenders overcome the challenging business environment, President Lee Jae Myung urged financial authorities last week to “explore ways to lower lending rates in regional areas.”