Regulator Tells Banks Not to Pull In Loans

By Park Hyong-ki

Staff Reporter

With the economy showing unfavorable signs from every direction, financial authorities called on banks to step up their risk management as a means to prevent possible defaults.

However, Financial Supervisory Service (FSS) Governor Kim Jong-chang said they should not make hasty retrievals of loans from corporate customers, as part of their efforts to improve risk management.

``Banks need to prepare for growing credit risks as the slowing economy is undermining the repayment capabilities of corporate and individual borrowers,'' said Kim at a forum for corporate executives.

But retrieving loans from corporations that show growth potential is not an appropriate response for any financial firms. He added banks should not do so just because companies are facing an immediate hardship in maintaining a sound balance sheet due to worsening economic conditions.

``Such a move is likely to lead banks to lose a good business opportunity (with corporations),'' said Kim.

Although banks have not yet shown signs of withdrawing loans, the FSS noted that the governor is merely sending a warning signal ahead of time to prevent possible herd-like behavior.

``Korean banks tend to show a herd-like behavior pattern ― when one bank, perhaps, starts to withdraw loans on credit, others follow suit,'' said Yang Hyun-keun, deputy-director of the regulatory body.

He noted that ``retrieval or withdrawal,'' refers to banks not wishing to extend or re-extend corporate loans due to economic uncertainties.

The deputy-director elaborated that the behavior has been present especially in the banking sector when they heavily relied on loans and deposits for expansion. The FSS said the rate of corporate loan issuance has been increasing at a moderate rate of 10 percent on average since the beginning of this year on heightened supervision.

``So it's safe to say that the market for corporate loans is stable,'' said Yang.

Analysts say the governor's remark is specifically targeted toward banks that may not extend loans to corporations hurt by rising energy costs.

``Not all corporations will be rejected for loans by banks,'' said Lim Il-sung, an analyst of Meritz Securities. ``I believe the governor is warning banks that may show unfavorable terms against business sectors likely to suffer under the current economic conditions.''

phk@koreatimes.co.kr