It's urgent to figure out severity of potential bad loans
As the real estate boom has receded, fears are growing that project financing loans in real estate might go sour en masse. According to the Bank of Korea, the amount of project financing loans for real estate at banks and non-banking financial institutions reached 112.2 trillion won ($78.6 billion) as of June this year. This figure represents an annual growth rate of 14.9 percent since 2014. Banks reported a moderate increase of 6.9 trillion won, whereas non-banking financial companies posted a rise of more than 70 trillion won.
But the total amount of project financing loans for property is likely to exceed 152 trillion won including asset-backed securities brokerages issued by setting development projects as underlying assets. If project financing loans extended by such organizations as the National Agricultural Cooperative Federation (NACF), which are not calculated into the central bank's statistics, are included, the real amount could surpass 200 trillion won.
Project financing is a loan structure that relies primarily on a project's cash flow. Financial firms receive commissions and interest in return for offering loans or debt guarantees. But if profitability deteriorates as a result of certain reasons, like a spike in the number of unsold apartments, the financial firms face a higher risk of not getting the loans paid back. Given that the number of unsold houses across the country keeps rising owing to interest rate hikes and tumbling property prices, it appears that the time is now.
Project financing for real estate is called the "goose that lays the golden egg" when the property market booms, but it can fall into insolvency in times of economic recession. A case in point is the global financial crisis in 2008, when depositors suffered huge losses as project financing loans extended by some savings banks became insolvent.
What's needed first is to figure out the serious problem of potential bad loans related to project financing for real estate. Considering that most non-banking financial companies have expanded their project financing loans in recent years, the financial authorities should hurry to ask them to strengthen risk management.
As the real estate boom has receded, fears are growing that project financing loans in real estate might go sour en masse. According to the Bank of Korea, the amount of project financing loans for real estate at banks and non-banking financial institutions reached 112.2 trillion won ($78.6 billion) as of June this year. This figure represents an annual growth rate of 14.9 percent since 2014. Banks reported a moderate increase of 6.9 trillion won, whereas non-banking financial companies posted a rise of more than 70 trillion won.
But the total amount of project financing loans for property is likely to exceed 152 trillion won including asset-backed securities brokerages issued by setting development projects as underlying assets. If project financing loans extended by such organizations as the National Agricultural Cooperative Federation (NACF), which are not calculated into the central bank's statistics, are included, the real amount could surpass 200 trillion won.
Project financing is a loan structure that relies primarily on a project's cash flow. Financial firms receive commissions and interest in return for offering loans or debt guarantees. But if profitability deteriorates as a result of certain reasons, like a spike in the number of unsold apartments, the financial firms face a higher risk of not getting the loans paid back. Given that the number of unsold houses across the country keeps rising owing to interest rate hikes and tumbling property prices, it appears that the time is now.
Project financing for real estate is called the "goose that lays the golden egg" when the property market booms, but it can fall into insolvency in times of economic recession. A case in point is the global financial crisis in 2008, when depositors suffered huge losses as project financing loans extended by some savings banks became insolvent.
What's needed first is to figure out the serious problem of potential bad loans related to project financing for real estate. Considering that most non-banking financial companies have expanded their project financing loans in recent years, the financial authorities should hurry to ask them to strengthen risk management.
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