Some Savings Banks Have PF Household Loans 26 Times Higher... Risky Real Estate Operations of Savings Banks

Savings Banks' Q1 PF Loan Balance Hits 10.2314 Trillion KRW
Real Estate-Related Loans Reach 32 Trillion KRW, Approaching Household Loans
Financial Supervisory Service Steps Up Focused Management of Savings Banks' PF Loans

[Asia Economy Reporter Song Seung-seop] It has been revealed that small and medium-sized savings banks located in provincial areas are focusing on high-risk project financing (PF) loans. Some companies took advantage of lax oversight to provide PF loans amounting to tens of times their household loan portfolios. There are warnings that if the real estate market downturn deepens in the future, PF loans could act as a time bomb.

On the 17th, Asia Economy surveyed the real estate loan status of all 79 savings banks and found that as of the first quarter of this year, the outstanding balance of PF loans was 10.2314 trillion won. The total amount of loans related to construction and real estate was 32.6999 trillion won. This is comparable to the household loan volume of 39.2403 trillion won executed during the same period.

PF refers to a financial technique where money is lent based on the project itself rather than the company’s credit or collateral. Future cash flows generated by the project are used as the repayment source. It is typically used in industries such as construction and real estate that require large-scale funding. While it can yield high returns, significant losses may occur if the project fails midway or if the real estate market declines.

Many savings banks have taken real estate-related loans up to the legal limit. According to current law, savings banks cannot exceed the ratios or amounts announced by the Financial Services Commission when providing real estate-related loans. Among the 79 banks, 30 (37.9%) provided PF, construction, and real estate loans exceeding 80% of their credit limits. Nine banks exceeded 90% of their limits.

Precarious Savings Bank PF Loans, Financial Supervisory Service Takes Action

Most of these were small and medium-sized savings banks located in provincial areas. In particular, some savings banks were found to have invested huge amounts in PF loans while hardly handling household loans. Sky Savings Bank’s household loans in the first quarter amounted to only 2.8 billion won, while PF loans executed reached 73 billion won?26 times the household loans. At Namyang Savings Bank in Gyeonggi Province, PF loans (51.8 billion won) were nine times the household loans (5.7 billion won).

The risks of PF loans are gradually increasing. A recent downturn in the real estate market has been observed. Additionally, rising raw material prices due to the Russia-Ukraine war and increased labor costs are raising concerns about delays or halts in PF projects. Since PF loan defaults were also the cause of the 2011 savings bank collapse, special caution is advised.

The Financial Supervisory Service (FSS) has already begun focused management. After inspecting about 1,100 PF loan projects, the FSS found that 2.2 trillion won had been disbursed to projects with low progress and sales rates. Nevertheless, loans classified as ‘normal’ amounted to 1.3 trillion won, accounting for 57.8% of the total.

FSS Governor Lee Bok-hyun also pointed out at a meeting with savings bank CEOs last month, “As construction costs rise and real estate prices fall, risks related to real estate finance are increasing significantly. Savings banks’ PF loans and other real estate-related loans account for about half of their total corporate loans, and the scale is expanding.”

In response, a Sky Savings Bank official explained, “It is a prejudice to think that PF loans are riskier than household loans and that a high proportion of PF loans is problematic. We only provide loans for projects where the business site is 100% secured, and we evaluate business feasibility and sales potential very conservatively. We also sufficiently set aside loan loss provisions according to FSS regulations.”