By Lee Hyo-sik
Staff Reporter
Local savings banks have been exposed to rising credit risks as they have expanded at the expense of their asset soundness, which many believe will become a major stumbling block to a full economic recovery once an exit plan is in place.
Savings banks here have been rushing to grow over the years by offering higher deposit interest rates than commercial lenders, attracting large amounts of money from mostly individuals. To cover the higher costs and realize larger net interest margins, they have been extending loans to construction firms and other businesses that are highly vulnerable to economic changes.
In particular, many provided loans to builders in the form of real estate project financing (PF), but the bulk of these have gone sour due to the sluggish property market here, with several savings banks in provincial areas going bankrupt under snowballing bad loans.
Despite these rising credit risks, savings banks continue to engage in a tug of war for industry leadership by attracting more funds from depositors and offering larger credits to riskier businesses, which could negatively affect the soundness of the nation's entire financial sector.
According to the Korea Federation of Savings Banks Sunday, 104 savings banks across the country held a combined 84.4 trillion won in assets as of the end of February, up 20 percent from a year earlier. The top five expanded their combined assets by 33.6 percent to 38.9 trillion won.
Korea's largest Busan Mutual Savings Bank had assets of 10.33 trillion won, up 35.4 percent over the one-year period, with Korea Savings Bank increasing its assets by 23.8 percent to 9.34 trillion won. Solomon Savings Bank, Hyundai Swiss Savings Bank and Tomato Savings Bank also boosted their assets by between 25 and 57 percent.
``Many individuals have deposited money at savings banks over the past year to get better interest rates as the Bank of Korea (BOK) cut its key policy rate to an all-time low of 2 percent against the worldwide economic slump. Savings banks offered higher deposit rates to attract greater funds mostly from households and offered loans to companies at high interest rates,'' said an official at the Financial Supervisory Service (FSS).
Some large-scale savings banks have taken over smaller ones, mostly in provincial areas, in a bid to expand and build a nationwide sales network.
However, the sluggish housing market and other negative business conditions put them at risk.
Analysts say if savings banks continue to grapple with higher default rates and depositors withdraw money en masse, Korea could suffer from a chain of bankruptcies at savings banks.
A savings bank's default rate averaged 13.2 percent in December 2009, down from 15.1 percent in June, as they wrote off non-performing loans. Additionally, the Korea Asset Management Corp. (KAMCO) bought bad debts from the banks, boosting their financial soundness. But the default rate surged again to 15.7 percent in February this year.
Savings banks usually extend about 50 percent of outstanding loans to construction firms, meaning that the ongoing stagnant real estate sector has been chipping away at their financial health.
The Financial Services Commission (FSC) is considering requiring savings banks to slash the ratio of real estate PF loans to 20 percent from the current 30 percent. It also plans to oblige savings banks to extend no more than 50 percent of their entire credit lines to the property sector.