By Kim Tong-hyung
Burned from their previous exposure to the country’s toxic property market, secondary banks have been avoiding builders and developers like the plague. This may deliver a hammer blow to what is already a brittle construction industry, which fears that a slew of bankruptcies are on the way.
According to data from the Financial Supervisory Service (FSS), Korean builders owed 28 trillion won (about $25.7 billion) to non-primary financial providers such as savings banks, insurance companies, hire-purchase firms and brokerages at the end of last year. This accounted for more than 70 percent of the remaining 38.7 trillion won in construction project loans from the banking sector.
Builders have been struggling to repay their debts and are concerned that the slumping property market has also eroded the patience of lenders, who appear ready to bail on the slightest sign of trouble.
A sense of urgency has been evident among secondary financial companies since February when regulators suspended some of the country’s largest savings banks after their finances were deteriorated by soured construction loans.
The secondary banks indulged in a lending spree over the past decade, principally funding construction and real-estate investments, to exploit the massive speculative demand spawned by property.
This all came tumbling down in the economic turmoil that erupted in 2008, which had banks running for cover and calling in loans. Borrowers unable to repay led to crises at a large number of savings banks before the FSS mercifully pushed them to the sidelines.
It’s now an every-bank-for-itself atmosphere and FSS officials say it’s a growing concern that savings banks are scrambling to rein in loans on every payment overdue.
“Savings banks will be calling in loans the moment they mature or from the companies that are late in principal and interest payments. The situation warrants careful monitoring as dried up money supplies may see weaker builders failing,” an FSS official said.
The alarm over a degenerating construction industry grew louder when Sambu Construction filed for court receivership Tuesday, stoking fears that more collapses were on the way as financial companies cut their ties with builders.
Sambu was the fifth builder filing for restructuring this year after Dong Il Construction, World Construction, Chin Hung International and LIG Engineering and Construction.
Just over a quarter of the top 100 construction firms, or 28 companies, have currently filed for either court receivership or workout plans led by creditors, according to the Construction Association of Korea.
The toppling of Sambu, a top-30 builder, was particularly shocking as it was one of the few builders that had been enjoying robust business, evidenced by the 837.4 billion won in revenue and 20 billion won in operating profit it posted last year.
However, Sambu officials claim the company had no other option but to file for court receivership as creditors were demanding excessive collateral in exchange for extending loan maturities.
“If Sambu experienced that much trouble in gaining faith from financial providers, smaller or worse-performing builders may not have prayer,” said a construction industry source.
Lending from savings banks, at over 12 trillion won, accounted for the largest part of project financing loans, according to FSS data. Around 4.9 trillion won was approved by insurance companies, 4.7 trillion won from asset-management organizations, 3 trillion won from hire-purchase firms, and 2.2 trillion won from securities businesses.
The delinquency rate for construction project loans increased from 4.4 percent at the end of 2008 to 12.9 percent at the end of last year. Delinquencies were more frequent among loans approved by secondary financial providers, according to FSS data, which shows the delinquency rate for loans issued by securities firms at 30 percent, savings banks at 25 percent and hire-purchase companies at 18 percent.
Since suspending the operations of eight savings banks, a list that included secondary banking heavyweight Busan Savings Bank and its subsidiaries, financial regulators have been pressing big commercial banks such as Woori and KB to absorb them.
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