Irregularities mar savings banks

By Kang Seung-woo

The nation’s financial watchdog said Monday that it unearthed irregularities at savings banks during its inspection of the ailing secondary banking sector.

According to the Financial Supervisory Service (FSS), savings banks made illegal investments disguised as lending to business entities linked to their largest shareholders via borrowed-name accounts.

The FSS plans to report this to the police after discussions with prosecutors.

The Financial Services Commission (FSC), the decision-making body of the FSS, ordered the suspension of operations of seven savings banks Sunday due to poor asset quality. The seven are Tomato, Jeil, Jeil 2, Prime, Daeyeong, ACE and Parangsae Savings Banks. The nation’s savings bank industry is suffering from soured construction loans amid the slumping property market, which has resulted in a total of 16 lenders being ordered to halt business operations this year.

The FSS said Tomato, ACE and Parangsae extended loans to business units run by their largest shareholders under borrowed names. The financial watchdog found that the size of illegal lending ranges from tens to hundreds of billions of won.

One savings bank extended a combined 640 billion won, 70 percent of its total assets, to two construction projects, while another lent money to its largest shareholders that operated business sites through multiple borrowed-name bank accounts.

“Those loans were impossible to extend if there had been a proper decision-making process because the price value of all the projects fell short of matching the borrowing,” said an FSS official.

Under the law, lending to the largest shareholder is a serious crime, which brings the offender a five-year jail term or fines lower than 50 million won.

However, there was no evidence that a bank had committed illegal lending by setting up special-purpose companies (SPC) as the already-suspended Busan Savings Bank did, according to the FSS.

Lending beyond credit limits was widespread in the remaining banks as well as the seven suspended ones. According to regulations, a savings bank’s total loans are required to stay below 20 percent of its equity capital.

The aforementioned illegal lending practices are seen as risk prone, so a non-loss provision is required that translates to the decline of equity capital and eventually, ends up a drop in the Bank of International Settlement (BIS) ratio, a measurement of financial soundness.

ACE saw its capital adequacy ratio sink from 8.51 percent to minus 51.10 percent in a year, while Tomato’s BIS ratio sank from 9.45 percent to minus 11.47 percent. The remaining suspended lenders also suffered a 10 percent or above depreciation to the negative range.

A few savings banks illegally exploited their expenses, as well, the FSS added.

The secondary banking sector estimates that there may be a dozen lenders which will be indicted for irregularities and the largest shareholders involved in the wrongdoings will lose the rights to hold that position.