Banks to Be Required to Set Aside More Bad-Loan Provisions

South Korean banks will have to increase provisions for possible loan losses, starting on the last day of this year, to cope with potential risks arising from a hike in corporate lending, the country's top financial watchdog said Tuesday.

According to the Financial Supervisory Service (FSS), the minimum provisioning ratio for corporate loans classified as "normal" will rise by 0.15 percentage point to 0.85 percent.

The corresponding ratio for loans to building, real estate and rental, retail and wholesale as well as restaurant and lodging sectors will go up by 0.5 percentage point to 1.2 percent. The ratio for loans classified as "precautionary" or "substandard" will remain unchanged at 7 percent and 20 percent, respectively, the FSS said.

"As banks' lending to corporations, mostly smaller firms, has soared since 2006, it would be proper to impose stricter rules on reserves to be prepared for future losses while lenders are still financially healthy," said the deputy governor of the FSS, Kim Dae-pyung. "Banks are also faced with falling loans to households

and deteriorating profitability."

Lenders' corporate loan growth came to 18.7 percent in the January-September period, accelerating from 14 percent in 2006 and 5.8 percent in 2005. The rise of loans to smaller firms reached 17.6 percent in the first nine months of this year, compared with 17.7 percent last year and 5.1 percent in 2005.

The relevant regulations are slated to be revised next month and be implemented on December 31, the FSS said.

In compliance with the new rules, the nation's 18 commercial lenders will have to set aside approximately 1.4 trillion won ($1.84 billion) more to cover loan losses when they close their books for 2007, it added.