Banks in South Korea will likely reduce their lending to local businesses and households in the third quarter due to the sluggish economy prompted by the new coronavirus pandemic, a central bank poll showed Monday.

In the quarterly survey conducted by the Bank of Korea, the index measuring the banks’ attitude toward fresh loans came to negative 11 for the July-September period, marking a sharp turnaround from 1 for the second quarter and 11 for the first three months of the year.

Such a change apparently comes as the local lenders anticipate higher risks for all borrowers, including households.

They expected the credit risk of households to rise to 43 from 40 in the second quarter, with that of large businesses climbing to 27 from 23 over the cited period.

The credit risk of small and medium-sized firms is expected to stay at 43, unchanged from the April-June period, according to the BOK.

The index measuring the banks’ attitude toward fresh home-backed household loans came to negative 17 for the third quarter, compared with negative 7 for the second quarter.

The index for fresh loans to large companies came to negative 13, dipping from negative 10 in the second quarter, while the index for smaller firms came to negative 10, a turnaround from 7 three months earlier.

“Banks’ attitude toward loans to businesses is expected to tighten due to their efforts to manage the soundness of their loans and also due to concerns over the firms’ reduced ability to pay back their debt,” the BOK said.

The BOK forecasts the local economy to shrink 0.2 percent from a year earlier in 2020, largely due to sluggish demand at home and abroad caused by the COVID-19 pandemic.

South Korea’s exports have dropped for four consecutive months since March, plunging 23.7 percent on-year in May and 10.9 percent in June, according to earlier reports.

A negative growth in Asia’s fourth-largest economy would mark the first of its kind since 1998 and only the third since 1953.

The banks are also expected to tighten their lending to local households, partly because of worsening economic conditions that may undermine their income, but also because of fresh government regulations, unveiled June 16, that would further limit home-backed loans to households, the BOK noted. (Yonhap)