"Real Estate PF Delinquency Rate Soars by 0.85%P... 'Factors Include Delays in Non-Performing Asset Cleanup'"

Financial Services Commission Holds 2nd Real Estate PF Soft Landing Measures Review Meeting
Rising Delinquency Rates "Also Influenced by Financial Sector's Strengthened Risk Management Efforts"
Revision of Industry-Specific Model Regulations and Internal Rules in June
Business Feasibility Assessments by Early July... 'Post-Management Plans' to be Submitted by End of July

The delinquency rate of real estate project financing (PF) loans in the financial sector stood at 3.55% as of the end of March, up 0.85 percentage points (P) from the end of last year. In response, financial authorities and related industries have agreed to steadily proceed with policies and self-help efforts for the smooth landing of PF, starting with revising sector-specific model regulations and internal rules in June, followed by business feasibility evaluations, management plan submissions, and post-management in July and August.

On the 5th, the Financial Services Commission held the '2nd Real Estate PF Smooth Landing Measures Review Meeting' jointly with the Financial Supervisory Service, Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, and other related agencies at the Bankers Hall in Jung-gu, Seoul. The meeting discussed financial market trends since the policy direction announcement last month, the schedule for detailed measures, and the status of PF loans in the financial sector as of the end of March.

As of the end of March, the delinquency rate of real estate PF loans in the financial sector was 3.55%, an increase of 0.85 percentage points from 2.70% at the end of last year. The financial authorities diagnosed that amid uncertainties in the PF market and sluggish funding supply to projects, the financial sector’s efforts to strengthen its own risk management and delays in clearing distressed PF projects contributed to the rise in delinquency rates.

The authorities particularly pointed out that in the savings bank sector, preemptive and phased strengthening of soundness management and supervision?such as restricting indiscriminate maturity extensions and interest deferrals for delinquent projects during creditor group agreements, and setting strict delinquency period calculation standards for projects whose agreements have ended?were factors contributing to the rise in delinquency rates. Additionally, efforts to prevent the expansion of PF loan volumes, which led to a decrease in loan balances, were also cited as a factor in the delinquency rate increase.

Participants at the meeting also evaluated that despite the rise in PF delinquency rates, banks and insurance companies, which maintain soundness, account for more than half of PF loans (65.0% of total balances). Considering the relatively low delinquency rates compared to past crises and the even distribution of PF loan maturities without concentration at specific points, the possibility of systemic risk transmission is very low. Furthermore, for securities firms and savings banks with high delinquency rates, the high capital ratios and substantial provisions already accumulated suggest that any additional losses in the future will be manageable. In fact, construction company-guaranteed PF-ABCP is being smoothly refinanced, and issuance rates are trending downward. The PF-ABCP issuance rate (A1·3M) fell from 4.56% in January to 3.99% in May.

"20-25% of all PF projects are subject to the first business feasibility evaluation"… Continuous industry feedback gathered

The authorities have continuously listened to on-site opinions regarding difficulties in implementing real estate PF smooth landing measures through meetings with the financial and construction industries and have reflected feasible suggestions. Regarding business feasibility evaluation criteria, they incorporated industry feedback by specifying cases recognizing project uniqueness, reflecting reasonable exceptions when counting maturity extensions, and revising exception rules for PF guarantees and pre-sale guarantee projects.

On this day, Kwon Dae-young, Secretary General of the Financial Services Commission, stated, "A separate briefing session for the construction industry is also planned for June," adding, "We plan to continue gathering opinions from the construction and financial industries even after the first business feasibility evaluation begins at the end of June."

Business feasibility evaluation criteria for each project will be revised in June through amendments to sector-specific model regulations and internal rules reflecting the opinions of the construction and financial industries. Financial companies will conduct business feasibility evaluations for each project by early July. They will submit post-management plans for projects of concern or at risk of insolvency by the end of July, and the Financial Supervisory Service will monitor post-management progress starting in August.

Additionally, temporary financial regulatory easing measures to facilitate smooth funding supply, restructuring, and liquidation of real estate PF have completed issuance of non-action letters and other documents for six priority tasks, including employee indemnification. The authorities plan to complete the remaining four tasks, such as allowing 'normal' classification of asset soundness for new funding supply, by the end of June.

Secretary General Kwon explained, "Business feasibility evaluations will be conducted sequentially, starting in June with projects that have many delinquencies or maturity extensions (about 20-25% of all projects)," adding, "We are also steadily progressing with revising creditor group agreements, forming syndicated loans, expanding auction and public sale standards, introducing Korea Asset Management Corporation (KAMCO) fund preemptive purchase rights, and providing additional guarantees for extra construction costs."

Meanwhile, the financial sector continues its own efforts for the smooth landing of PF. The savings bank sector fully executed the first 'Distressed Asset Cleanup Fund' worth 33 billion KRW in March and is pushing to form a second fund exceeding 460 billion KRW. The credit finance sector also formed a first PF normalization support fund of about 160 billion KRW, which is scheduled for full execution in June, and has established a second fund worth 260 billion KRW.

Secretary General Kwon said, "Together with related agencies, we will continuously gather opinions from the financial and construction industries and closely monitor the detailed progress of PF smooth landing measures, including business feasibility evaluations and financial companies’ delinquency rates, and will promptly respond in consultation with related agencies as needed."