Record number of ailing smaller firms may face overhaul

Korean banks have put a record number of ailing smaller firms on a restructuring list this year as the economic slowdown has squeezed their funding conditions, industry sources said Tuesday.

Local banks reported to the financial watchdog that 1,355 small and medium enterprises (SMEs) will be on the list of companies to receive reviews for corporate overhaul, according to the sources. The figure is tentative and subject to change later.

Banks select candidates for corporate restructuring by evaluating financial conditions among smaller firms that have borrowed 5 billion won ($4.42 million) to 50 billion won from lenders.

The 2012 number represents a 20 percent rise from 1,129 troubled smaller companies tallied last year, according to data by the regulator. Given that banks have regularly selected those candidates based on the volumes of such credit supply since 2009, the 2012 tally would mark the largest since the onset of the 2008 global financial crisis, it added.

Smaller firms are usually hit harder when the economy is losing steam, as banks become more cautious about lending money to them due to their relatively high credit risk.

Local banks classify smaller companies into four categories by assessing their liquidity conditions and credit risk. Those that are put on the third tier undergo debt rescheduling and companies at the bottom of the list will be kicked out of the industry, subject to file for court receivership.

Korean banks pump money into smaller firms sitting on the second tier of the list in a bid to ease their acute liquidity shortage under the industry-wide program named "fast track."

"It seems that the number of struggling smaller firms on the third and fourth tier is expected to sharply increase this year," said an official at the Financial Supervisory Service.

The data came as the Korean economy is losing steam, hit by faltering exports and sputtering domestic demand. Asia's fourth-largest economy grew a mere 0.4 percent on-quarter in the second quarter.

The local construction sector has been struggling to stay afloat, as the slowing economy and a slumping property market are increasing the number of unsold apartments and delaying household's home buying, further leading to falls in property prices.

The Korean government is urging local banks to provide funding to smaller firms that are facing acute liquidity shortages, but fundamentally remain sound as potential bankruptcies of ailing SMEs are feared to further weigh on the economy.

Korean banks are doing business in a highly cyclical pattern, in which they tend to excessively pump liquidity into borrowers when the economy is booming, but also aggressively retrieve loans when the economy slows. (Yonhap)