Financial Supervisory Service Revamps PF Project Management System to Encourage 'Voluntary Normalization'

2023 Business Plan Announcement

[Asia Economy Reporter Yu Je-hoon] Regulatory authorities are reorganizing the management system for real estate project financing (PF), considered the biggest risk factor for the Korean economy this year, on a project-by-project basis to enable comprehensive and systematic responses. Additionally, through support for revising the 'PF Lenders' Agreement,' they aim to encourage autonomous project normalization for projects with potential insolvency risks.

On the 6th, the Financial Supervisory Service (FSS) disclosed its 2023 business plan containing these details. The FSS's move to strengthen real estate PF risk management this year is due to the rapidly expanding loan volume in this sector. According to the FSS, the outstanding loans related to real estate PF across all financial sectors increased by 38.7%, from 90.3 trillion KRW at the end of 2020 to 125.3 trillion KRW as of the end of September last year, driven by the 'real estate boom.'

During the same period, due to inflation, the U.S. Federal Reserve (Fed) and the Bank of Korea began raising benchmark interest rates, causing the real estate market to cool sharply. Consequently, the delinquency rate on PF loans across all financial sectors also rose from 0.68% to 0.90% during this period.

Accordingly, the FSS will reorganize the real estate PF management system, currently managed by each financial sector, into a project-based system for comprehensive and systematic management. They plan to strengthen analytical frameworks tailored to the type of PF development projects?such as residential, logistics, and commercial facilities?as well as project progress indicators like completion rate and pre-sale rate. Furthermore, the FSS will continue consultations with related agencies, including the Ministry of Economy and Finance, the Ministry of Land, Infrastructure and Transport, and the Financial Services Commission, to provide 'customized support' suited to each PF project's circumstances.

In preparation for an expansion of PF insolvencies, the FSS will also support revisions to the PF Lenders' Agreement in the first quarter to enable lenders to autonomously induce project normalization. Since multiple financial institutions participate as lenders in PF projects, if a project becomes insolvent, significant time is required for normalization or liquidation. Accordingly, the authorities established decision-making and processing standards for insolvency through the PF Lenders' Operating Agreement in 2009. They now plan to reorganize this framework to proactively manage risks for projects that are insolvent or at risk of insolvency.

The FSS stated, "In preparation for the spread of market risks originating from real estate, we will integrate the real estate PF management systems, currently managed by financial sectors, into a project-based system and respond proactively to intensively inspect PF project risks. We will also continue consultations with related agencies throughout the year to determine handling directions and support methods for each PF project."