Bad bank to deal with builders’ soured loans

By Kang Seung-woo

The nation’s financial watchdog said Monday that the top five financial groups may set up a “bad bank” as a way of dealing with soured project financing (PF) loans that are weighing down on construction companies and savings banks.

“The five leading banking groups will chip in money to the bad bank, if established,” said Joo Jae-seong, deputy governor of the Financial Supervisory Service (FSS).

Joo’s statement came after Financial Services Commission (FSC) Chairman Kim Seok-dong and FSS Governor Kwon Hyouk-se met with the heads of KB, Shinhan, Woori, Hana and Korea Develop Bank (KDB) Financial Groups. The FSS is the executive arm of the FSC.

A bad bank is a financial vehicle that takes over non-performing loans from other banks, enabling them to make a fresh start. The bad bank could be established in the next couple of months, according to FSS officials.

Despite the FSS statement, the FSC, the decision-making body of the FSS, said there had been no discussions on the creation of a bad bank.

The move came as Sambu and other mid-sized construction firms have filed for bankruptcy protection after failing to repay maturing loans that financed their construction projects amid the slumping housing market.

Korea’s property market has yet to see signs of recovery since the onset of the global financial crisis in 2008 and, as a result, 29 out of the top 100 builders were put under workout programs or court receivership as of Sunday, according to the Construction Association of Korea (CAK).

The FSS said that PF loans that will mature this year are expected to reach 25 trillion won ($22.9 billion), with more than half of them, worth 13.8 trillion won, due in the second quarter of this year.

Amid growing concerns, the FSC chairman urged the financial sector to give more help to liquidity-squeezed builders.

“Local financial firms are not active in supporting construction companies via PF loans given that Sambu Construction entered court receivership last week,” Kim was quoted as saying in the meeting.

“Financial holding companies play a critical role in leading the industrial sector and the financial market, and recently concern has been raised over whether they provide appropriate and effective financial support to economic activities,” Kim said, based on the perception that major local banks have been averse to rolling over maturing loans or forced builders to repay them.

Kim, who took over the helm in January, offered an apology for the recent hacking of Hyundai Capital and the crashed banking network of the National Agricultural Cooperative Federation (Nonghyup).

“I feel sorry that the problems linked to electronic systems took place in financial companies which operate on the basis of customer trust,” he said. “I expect financial holding groups to deal with their security systems.”

Hyundai Capital, the nation’s largest lender in the country’s secondary financial sector, had the personal information of more than 420,000 of its customers stolen by hackers two weeks ago, with as many as 13,000’s personal identification numbers (PINs) for loans stolen.

Last week’s computer glitch at the agricultural cooperative lender, which has the largest banking network in the country, inconvenienced its customers trying to use Nonghyup-issued credit cards and automatic teller machines.

Kim also expressed concerns about overheated competition in the credit card industry, citing the crisis in 2003, which involved more than 3 million people defaulting on payments.