State-run bank's ability to lead restructuring in doubt

By Choi Sung-jin

“There are no institutions in Korea that can carry out industrial restructuring better than the Korea Development Bank,” said Financial Services Commission Chairman Lim Jong-ryong Friday.

The top regulator was referring to KDB’s long involvement in the troubled shipping and shipbuilding companies as the state-run lender.

Not many experts seem to agree with Lim, however.

On the contrary, some private analysts say the government-run bank has neither the ability nor moral justification to reform the troubled industries and companies, given KDB’s history smeared by government-dictated lending and rampant cronyism and nepotism in personnel management.

“Unless Korea starts by reforming these state-run banks, it would end up filling a bottomless vessel,” a commentator said.

There is no dearth of examples. In February 2013, a regional branch head of KDB moved to the position of vice president of Gangnam Beltway, in which KDB had equity. The bank invested 200 million won ($173,500) into this company the following month, immediately followed by a 3.8 billion-won loan. Ssangyong Cement Industrial ushered in another KDB official as its vice president in April 2015, and was allowed to roll over its 100 billion-won loan. A KDB manager transferred to vice president of Daewoo Shipbuilding & Marine Engineering (DSME) in March last year. DSME received investment funds of 50 billion won from KDB at that time.

The state-run bank has many affiliated companies through debt-to-equity swaps. There are 377 firms in which KDB has equity of 5 percent or more. Retired KDB officials and politicians have taken positions in many of these, hampering their restructuring. Between 2008 and the first half of last year, 102 former KDB officials transferred to affiliated firms, most of which received additional loans or extensions of payment deadlines for existing borrowings.

It has been nearly a decade since experts raised the need for the shipbuilding industry’s restructure because of the global business slump and rapid chase of Chinese shipyards. The government and state-run banks, however, have kept providing funds for marginal companies without trying to restructure them.

In 2014, officials discussed the proposal to merge two ailing companies – STX Ocean & Shipbuilding and Sungdong Shipbuilding & Marine Engineering – and increase its company value by trimming surplus manpower and equipment before selling it. But their main creditor banks, KDB and the Export and Import Bank of Korea (Eximbank), failed to narrow their differences over sharing losses from consolidation. When the industry fell into a deeper slump, Eximbank extended an additional 300 billion won to Sungdong to extend its life.

KDB’s ratio of non-performing loans soared to a record-high 5.68 percent at the end of last year, nearly five times the average 1.14 percent for commercial banks. According to a report by the Korea Development Institute, state-run banks entered into the restructuring of marginal businesses about 2.5 years later than commercial banks, on average.

When talking about KDB’s lax management and shaky financial structure, it is impossible not to mention the government’s control in lending and personnel appointment.

KDB’s top managers, including its former and incumbent governors, are the political allies of President Park Geun-hye. Regulators are not free from blame. The Financial Supervisory Service attempted to discipline 12 former and present KDB officials in August 2014 for causing bad debts of 300 billion won related to STX, but ended up slapping the wrist of just one official.

“KDB should have put STX into court receivership years ago but its former governor did not want to take the responsibility for the loss of trillions of won to be caused by such a move,” said a former KDB official. “He and other bank officials just kept dragging their feet, hoping a boom would return to the industry, which never happened.”

The KDI report said: “State-run banks just continued to pour money into ailing businesses and industries, just watching the faces of bureaucrats and politicians instead of positively dealing with crises.”

The bigger problem is the vicious circle, in which leaders regard state-run banks as little more than political trophies and send unqualified people to run them, and these banks dispatch their officials to companies receiving policy loans, a critic said, adding this practice needs the most urgent restructuring.