Some savings banks are delaying the cleanup of problematic real estate project financing (PF), as revealed by inspections from the Financial Supervisory Service. Even though six months have passed since arrears occurred, they are either not listing problematic PF business sites for auction or setting a price higher than the loan principal to ensure the properties remain unsold.
According to the financial sector on the 4th, the FSS imposed a 'management caution' on Anguk Savings Bank on the 24th of last month due to delays in dealing with problematic PF. A management caution requires improvement within six months of notification for matters deemed necessary for management action, based on the results of FSS inspections.
The FSS found that Anguk Savings Bank had not complied with the 'real estate PF loan handling regulations', which state that PF loans more than six months in arrears must be put up for auction every three months. The FSS noted in a sanctions announcement that ''despite the arrears exceeding six months or six months having passed since auction cancellations or suspensions, no legal procedures such as auction or re-auction have been initiated.''
The PF business sites that were put up for auction were confirmed to have set the minimum bid higher than the loan principal. This meant that the minimum bidders submitted bids higher than the appraisal value of the PF business sites or the land purchase price, resulting in those sites continually remaining unsold. There were also instances where borrowers extended loan maturities even though they failed to comply with self-rescue conditions.
Financial authorities are restricting the indiscriminate extension of maturities and deferral of interest to contain so-called 'zombie business sites' that remain operational despite having low business viability. The FSS stated that 'Anguk Savings Bank's performance in the sale or transfer of bad debts is insufficient, raising concerns that it may continuously fail to achieve its target arrears ratio, and has instructed to strengthen the provisioning for loan losses.'
Savings banks are delaying the disposal of PF business sites in various ways despite the financial authorities' directive for swift restructuring, as they expect the real estate market will recover. Given a rebound in real estate due to interest rate cuts, they do not wish to sell sites at a low price. The delay in cleanup is leading to a rapid increase in arrears. According to the Bank of Korea's 'Corporate Lending Status by Financial Sector,' the arrears ratio for real estate loans from savings banks was 15.95% at the end of the third quarter last year, up 8.8 percentage points compared to the end of the previous year. It has risen 12 times compared to two years ago.
Financial authorities are increasing pressure on savings banks that are lukewarm in dealing with problematic PF. The FSS has decided to jointly conduct checks on the adequacy of the PF lending process for small savings banks in collaboration with the Korea Deposit Insurance Corporation starting this year. Until now, only five to eight savings banks with assets exceeding 2 trillion won had undergone this inspection, but now all savings banks will be inspected regardless of size. The FSS and the Korea Deposit Insurance Corporation will inspect the entire lending process, including loan approval, examination, and post-management, and will take immediate action against any illegal or improper conduct discovered.
Financial authorities are also in the process of identifying problematic savings banks. Some savings banks are reportedly facing a timely corrective measure review by financial authorities. A timely corrective measure requires financial firms to take actions such as stock cancellations or mergers, and business suspensions if their financial health declines below certain criteria. Anguk Savings Bank was subject to the first stage of a timely corrective measure, a 'management improvement recommendation,' in December last year. Accordingly, it must improve its financial health indicators within six months. As of the end of September last year, Anguk Savings Bank's arrears ratio and ratio of non-performing loans were 19.4% and 24.8%, respectively, which is more than double the industry average.