South Korea's four major financial groups reported approximately 3 trillion won (around $2 billion) in loans classified as "estimated loss" — the worst category under regulatory guidelines — as of the end of March 2025, according to financial sector data released on Sunday, 3 May. The figure marks a 5.8 percent rise from the same period a year earlier, signalling mounting stress in the country's banking sector.

What 'Estimated Loss' Means

Under South Korean financial regulatory guidelines, banks classify their loan portfolios into five categories based on asset soundness: normal, precautionary, substandard, doubtful, and estimated loss. Loans tagged as "estimated loss" sit at the very bottom of this scale, indicating that lenders have almost no realistic hope of recovering the funds. The combined 2.9 trillion won in such loans across the four groups reflects a broad deterioration in borrower repayment capacity.

The Four Groups and Their Exposure

The financial groups in question are KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group, as reported by Yonhap news agency. Among them, Hana Financial Group recorded the steepest year-on-year jump in estimated-loss loans at 30.3 percent, followed by KB Financial Group at 27.2 percent and Woori Financial Group at 12.4 percent. Shinhan Financial Group was the sole outlier, reporting a 20.1 percent on-year decline in such loans.

Why Loans Are Going Bad

A bank official from one of the commercial lenders attributed the deterioration to the lingering burden of elevated interest rates. "The burden of high interest rates has weakened the repayment capacity of the self-employed and small and medium-sized business owners, who took out loans when interest rates were low," the official said. This pattern — borrowers locking in cheap credit during low-rate years only to struggle when rates climbed — has been a recurring theme across several Asian economies since 2022.

Market watchers also pointed to external shocks, noting that the Middle East conflict contributed to rising oil prices and inflation, which in turn placed additional pressure on South Korea's local real estate market. A surge in delinquencies on real estate project financing loans has compounded the stress, according to the fact book released by the four lenders. Notably, the real estate financing segment has been a growing concern for Korean regulators over the past two years.

Broader Context and What Comes Next

This comes amid a wider global trend of rising non-performing loans as the era of ultra-low interest rates unwinds. South Korean regulators have been tightening oversight of bank loan classifications and provisioning requirements, but the Q1 data suggests those measures have yet to fully contain the damage. Analysts will be watching whether Shinhan's improvement is a structural turnaround or a one-quarter anomaly, and whether the pace of deterioration at KB and Hana moderates in the coming quarters. The next quarterly disclosures are expected to provide a clearer picture of whether the worst is behind South Korea's banking sector or still ahead.