By Kang Seung-woo
Staff reporter
Local savings banks are emerging as one of the key hurdles to an economic recovery and the financial market rebound, as a growing number of loans extended by them are running high risks of turning sour due to the sluggish real estate market.
They have been criticized for using taxpayers' money to make up for losses incurred by their "high-risk, high-return" business strategy, which has resulted in reckless risk management and aggressive credit extension in project financing (PF).
Market analysts said that financial regulators should also be accountable for the savings banks' fiasco as their loose monitoring was attributed largely to the massive insolvencies.
PF is the financing of a long-term project, usually real estate development such as the building of apartments or shopping centers, in which the debt is paid back from the profit generated by the project.
Financial companies approve the loans if they determine that the project will be profitable. But the problem associated with PF is that if a real estate market stays in the doldrums for a long period, the project fails to generate cash flows, which can drive lenders into trouble. That's what's happening to local savings banks.
After suffering the credit card crisis, which shut down 32 savings banks and forced several million people to become credit defaulters, swept through the nation in 2003, they turned to construction firms on the back of a booming real estate market in 2005.
In particular, many provided loans to builders in the form of real estate project financing with the loans rising from 6.3 trillion won to 11.6 trillion won, but the bulk of these have turned bad due to the declining property market.
Savings banks' loans to construction companies comprise of about 50 percent or their totals, meaning that the ongoing stagnant construction industry has been chipping away at their financial health.
"Due to an absence of a clear profit model among small and mid-sized savings banks, they just follow what their large-sized counterparts do in generating revenue," an official of a local savings bank said.
"That has added to risks."
The financial regulators are being hit for their sluggish monitoring.
When previously pouring in 1.7 trillion won, they were confident that it would stop the bad loans in PF, but to no avail.
In addition, the support for savings banks which triggered the financial woes due to an indiscreet surge in the housing market also draws criticism for fear of a moral hazard.
"It is not easy for 30 to 40 people to closely watch more than 100 savings banks, but in future cases, we will strengthen supervision on them," an FSS official said.
According to the financial regulators, they will encourage restructuring in the industry by signing memorandums of understanding with individual savings banks by net month, under which they will be forced to slim down their business.
The government announced Friday that it would buy 3.8 trillion won ($3.1 billion) in bad loans from local savings banks in an attempt to protect them against growing loan defaults caused by a struggling real-estate market.
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) said in a joint briefing that the government would buy the non-performing loans at a discounted 2.8 trillion won by the end of June to calm market jitters over the financial industry's grapple with unpaid bills from builders, as the construction sector has not recovered from the global financial crisis.
In the purchase, a state restructuring fund will pay 2.5 trillion won and Korea Asset Management Corporation (KAMCO) will provide 300 billion won to take over the bad loans.
According to the financial authorities and the Korea Deposit Insurance Corporation (KDIC), the 92 savings banks were provided with 8.57 trillion won, through the Asian financial crisis in 1997 and the credit card debacle in 2003.
The 2.5 trillion won from a state restructuring fund also comes from taxpayers' money, which means the government has spent more than 11 trillion won on belly-up savings banks.
In addition, the money from the KDIC, which is an insurance premium for deposits from financial institutions, is often used to help them.
Since the deposit insurance fund was established in 2003, savings banks have received 4.39 trillion won in support, accounting for 95.1 percent of 4.61 trillion won which has been used to normalize the management and clear out faltering enterprises.
Ahead of Friday's rescue package, the government bailed out savings banks after spending 1.7 trillion won on two previous occasions, all of which came from KAMCO, between 2008 and 2009.
Savings banks, formerly community-based mutual savings and finance companies, have been rushing to grow over the years by offering higher deposit interest rates than commercial lenders, attracting large amounts of money, mostly from individuals.