Banks face high default risks on 'green' loans

By Lee Hyo-sik

Banks are facing high default risks on green industry loans, a scenario that could wreak havoc on the institutions’ financial soundness.

Over the past few years, Kookmin, Shinhan, Woori and other commercial lenders rushed to extend loans to solar panel makers and other green companies, in line with the Lee Myung-bak administration’s green growth policy.

They had expected that the green industries would flourish due to government support and high fossil fuel prices. Because of the prolonged global slump, however, alternative energy industries such as solar power, wind power and bio fuels failed to take off.

The Financial Supervisory Service (FSS) revealed Tuesday that local lenders have extended 13.5 trillion won ($12.7 billion) in green industry loans as of September last year, up sharply from 5 trillion won in December 2009.

The FSS said that about 16 percent of the total, or 2.2 trillion won, were provided to unprofitable firms. Further, nearly 66 percent of the loans were provided without collateral.

Kookmin Bank, for instance, extended 1.7 trillion won in green industry loans, 92 percent of which were offered without collateral.

“It seems that banks did not properly do their homework. They applied loose loan guidelines as to whether to extend credits to green businesses,” an FSS official said. “Lenders were largely blinded by a wide range of policy support green industries get from the government,” he added.

Solar cell manufacturing has been hit particularly hard. Out of nine producers that used to operate in the country, only OCI remains. Woongjin Group, which is currently under court receivership, fell into significant debt from investing in solar panels.

The situation with solar cells is not much different overseas. In the U.S., for instance, Evergreen Solar and similar companies went bankrupt, while Germany’s Q Cells went under in April last year after losing 846 million euros ($1.1 billion).