By Kang Seung-woo
Local savings banks’ losses from bad construction loans are expected to worsen, as their reserves for lending have increased, a lawmaker said Monday.
Rep. Park Sun-sook of the main opposition Democratic Party said in a press release that the domestic savings bank sector has to set aside an additional 1.1 trillion won reserve this year in order to cover its non-performing loans, with the amount totaling 2.98 trillion won ($2.79 billion) thus far.
The total reserves are the loan-loss provisions calculated by the Financial Supervisory Service (FSS)’s on-site inspections of savings banks in 2008 and 2010, with the lenders’ bad-debt funds deducted.
According to Park, the remaining reserves that the secondary banks had to also accumulate stood at 337.5 billion won in 2008 and 1.55 trillion won in 2010. Last month, the Financial Services Commission (FSC) extended to five years a deadline for savings banks to accumulate reserves.
This year, the financial watchdog carried out an inspection of the ailing industry from May 30 to June 6, which found that it must set aside the additional funds against bad project financing (PF) loans.
The 3 trillion won reserves made up around 60 percent of the sector’s 5.1 trillion won in equity capital as of the end of June.
“The reserves could undergo a change following the FSS’ ongoing full-scale investigation into 85 savings banks,” said an FSS official.
The financial authorities and savings bank industry are in a tug of war over the criteria to discern sound and unsound entities.
The government strongly requires savings banks to accumulate provisions, while lenders say that its call is too tough.
“It is questionable whether incumbent major shareholders of savings banks have enough money to meet with the government’s requirements,” said an official of the secondary banking sector.
“Otherwise, they have no choice but to be shut down like the recently suspended Kyungeun Mutual Saving and Finance.”
The report comes amid growing speculation that the FSC will suspend operations of several savings banks, when its review on the Bank for International Settlements (BIS) ratios is finished in September.
The government, which fears that the distressed savings banks can negatively affect the nation’s financial industry, spent 5.4 trillion won buying sour PF loans between 2008 and 2010, and in June it decided to pool 1.4 trillion won for additional purchases of bad loans.