By Kang Seung-woo
Korean banks are facing a bumpy road ahead in their move to fix their balance sheets already spoiled by massive defaults in project financing (PF), with a growing number of loans to small- and medium-sized enterprises (SMEs) becoming insolvent.
What is of more concern is that banks will have to pile up more loss reserves for loans to SMEs as drastic restructuring slated for October will drive many debt-loaded firms into bankruptcy.
The Financial Supervisory Service (FSS) reported Monday that the ratio of bad loans to the total extended to SMEs reached 3.04 percent at the end of the June, up 0.85 percentage points from three months ago.
This was the highest since the FSS began compiling related data in September 2003. The bad loan ratio refers to the portion of loans overdue for more than three months.
The watchdog said that the surge in bad loans was attributed to recent corporate debt restructuring programs led by local lenders.
On June 25, creditor banks unveiled a list of 65 firms, including 16 builders, which were put under creditor-led restructuring programs in order to prevent their financial problems from translating into the entire financial system.
The on-going economic recovery appears not to have touched small and medium enterprises (SMEs) yet, as the proportion has continued an upward climb.
The SME bad loan ratio reached 2.49 percent in June 2009. It then dipped to 1.8 percent in the final quarter of last year, but since the first quarter has been on an upswing, affected by the industry-wide corporate overhauls.
The amount of bad SME loans at banks has also been increasing sharply.
Since the third quarter of 2008, it has risen by 9.1 trillion won ($7.62 billion) to 15.8 trillion won in June, compared to a 6 trillion won increase in loans to large corporations in the same time frame.
Along with the restructuring program, the top organization of SMEs pointed out unfair business practices by larger conglomerates is the reason for the soaring bad loan ratio.
Earlier this month, the Korea Federation of Small and Medium Business said that raw material costs grew 18.8 percent, while payment for deliveries went up just 1.8 percent in a comparison between January 2009 and April 2010.
The government announced last month that it will launch a full-scale inspection into large corporations in August in a bid to root out any unfair business practices between large and small enterprises.
To make the situation worse, there is speculation that the bad loans are predicted to mount during the second half of the year due to a scheduled credit risk assessment.
Banks plan to tighten their credit risk standards and wrap up their evaluation on SMEs which owe more than 5 billion won by October.
“Due to restructuring, bad loans will increase for the time being,” an FSS official said.
“But over the medium or long term, they will decrease.”