S. Korea to Inject W12 Tril. Into Banks

South Korea will initially inject 12 trillion won ($7.98 billion) into local banks in March to bolster their capital bases and encourage risk-averse lenders to expand loans, Yonhap News reported.

The move comes as banks are increasingly reluctant to lend money to cash-strapped companies on fears that a deepening economic slump may result in more bad loans, compromising their financial soundness.

The Financial Services Commission (FSC) said the money will come from a 20 trillion won bank recapitalization fund to be used to buy subordinated bonds and hybrid debt from lenders. Local banks can apply for the funds by the end of this month.

The amount of capital injection will be determined by the size of a bank's assets and will be adjusted according to changes in its so-called capital adequacy ratio and track record of lending to smaller firms, the watchdog said.

"The fund will set sail in a bid to prompt banks to give support to the real economy and accelerate the corporate restructuring drive," Kim Kwang-soo, director-general at the financial services bureau of the FSC, was quoted as saying at a press conference. "Management interference (by the government) will be excluded."

Since late last year, local banks have been struggling to raise their falling capital adequacy ratio, a key barometer of financial health, as the slowing economy and the corporate restructuring drive are increasing the amount of bad loans.

The government has said that local banks can tap the recapitalization fund on a voluntary basis, but banks are wary of using the fund due to fears it may tarnish their credibility.

But in a meeting with Chin Dong-soo, chairman of the FSC, nine heads of local banks agreed in principle to use the fund, through which they would increase lending to cash-strapped smaller firms and brace for the slowing economy and a corporate revamp.

Local banks' lending to smaller firms dipped by 1.8 trillion won in December before increasing by 3.1 trillion won in January, according to data compiled by the watchdog.