SEOUL, Aug. 30 (Yonhap) -- South Korean banks' bad debt ratio related to lending to smaller firms hit a record high in the second quarter, hit by corporate restructuring, the financial watchdog said Monday.

   Local banks' non-performing rate for loans to small and medium enterprises (SMEs) stood at 3.04 percent as of the end of June, up 0.85 percentage points from three months earlier, according to the Financial Supervisory Service.

   The figure marked the highest level since September 2003 when the watchdog began to compile related data.

   Bad loans or loans classified substandard and below are debts that are overdue for over three months. The non-performing loan ratio refers to the percentage of bad loans to aggregate lending.

   The watchdog said a hike in the bad debt was attributable to industry-wide corporate overhauls. In late June, local banks unveiled a list of 65 nonviable firms, including 16 builders, which will face creditor-led corporate revamps.

   In the aftermath of the global financial turmoil, banks' bad loans to SMEs had been on the rise until the second quarter of 2009 when the rate reached 2.49 percent. The economic recovery helped the ratio dip to 1.8 percent in the fourth quarter of last year, but the corporate revamp has been jacking up the bad debt since the first quarter.

   Experts expressed worries that banks' bad loans will likely increase in the second half as banks plan to continue to conduct credit risk assessment until October on companies that owe more than 5 billion won (US$4.2 million) to the financial sector.

   sooyeon@yna.co.kr
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