NPL market set to grow as rate-hike fears mount — 'Rethink funding and recovery strategies'

Samjong KPMG's report on NPL market trends and the H2 2026 outlook [Samjong KPMG]

With slowing economic growth and the prospect of a benchmark interest rate hike converging, the volume of non-performing loan sales in South Korea is expected to increase further in the second half of this year. Financial institutions and investors should develop investment and recovery strategies that comprehensively account for funding costs and changes in the real estate market, a new report recommends.

Samjong KPMG, in its recently published report on NPL market trends and the H2 2026 outlook, projected that NPL sales will become even more active in the second half as financial institutions step up efforts to strengthen asset quality.

According to the Financial Supervisory Service, the ratio of substandard-and-below loans at domestic banks stood at 0.60 percent in the first quarter of this year, continuing an upward trend that began in the third quarter of last year. The total volume of non-performing loans also reached 17.7 trillion won ($11.6 billion) as of the first quarter, maintaining a steady increase.

Financial institutions are increasingly opting to sell off NPLs rather than pursue direct recovery, factoring in the time and cost of disposing of collateral or rehabilitating borrowers, the burden of provisioning for loan losses, and the financial authorities' tightening stance on asset quality management. The share of NPL disposals accounted for by outright sales rose from 16.4 percent in 2022 to 33.2 percent in 2023, then to 37.6 percent in 2024, before edging down slightly to 36.2 percent in 2025.

NPL market outlook for H2 2026 [Samjong KPMG]

The report projected that persistently high inflation and exchange rates, combined with sluggish regional economies, will push up corporate loan delinquency rates in the second half. Both banks and non-bank financial institutions are expected to increase the volume of NPLs they put up for sale, with banks in particular likely to expand sales centered on commercial and residential mortgage-backed loans tied to small and medium-sized enterprises and sole proprietors.

The surge in NPL supply is also expanding opportunities in the investment market. In both 2024 and 2025, non-performing loans with a combined outstanding principal balance of 8 trillion won each year were brought to market.

Major NPL investment firms — including Yeonhap Asset Management, Woori Financial F&I, Daeshin F&I and Hana F&I — have been loading up on capital through rights offerings and corporate bond issuances and actively participating in bidding. As of the second quarter of this year, these firms accounted for 89.2 percent of all NPL investment transactions by deal count and 90.3 percent by investment volume.

Annual trend in average NPL acquisition rates [Samjong KPMG]

The large supply of NPLs has eased price competition somewhat. The average NPL acquisition rate — measured as the winning bid divided by the outstanding principal balance — fell to 68.2 percent in the second quarter of this year.

Even so, investment firms are expected to grow increasingly cautious. Specialist NPL investors have already purchased roughly 22 trillion won worth of non-performing loans since 2023, and the risk of prolonged recovery timelines has grown due to rising funding costs and a weak regional real estate market. Going forward, selective investment — carefully weighing the profitability and recoverability of individual assets — is expected to become the dominant approach for new deals.

The report identified the prospect of a Bank of Korea benchmark interest rate hike, driven by concerns over a resurgence of global inflation and a tightening stance among major central banks, as the single biggest variable facing the NPL market. A rate increase would not only raise funding costs for investment firms but could also depress collateral asset values and extend recovery timelines.

Kim Jeong-hwan, a managing director and NPL advisory leader at Samjong KPMG, said that as the likelihood of a benchmark rate hike grows, domestic financial institutions are likely to accelerate NPL disposals and sales in response to rising delinquency rates. "By contrast, specialist investors that have already acquired a substantial volume of NPLs are expected to apply stricter criteria to new investments in an environment of higher funding costs," he added.

Kim also said that regional commercial and residential real estate makes up a significant portion of the underlying assets in NPL portfolios, meaning a prolonged slump in regional property markets could extend recovery periods. "Institutions must rigorously build out a risk management framework that comprehensively considers funding strategies that account for potential rate hikes, appropriate leverage management, valuations that reflect market supply and demand, and medium-to-long-term recoverability," he said.

Meanwhile, Samjong KPMG — which closes its books in March — posted operating revenue of 905.6 billion won for the current fiscal year (April 2025 to March 2026), a roughly 3.4 percent increase from the previous year, crossing the 900 billion won threshold for the first time.

an@heraldcorp.com