Savings Banks' 3rd Real Estate PF Fund Formation Becomes More Difficult

Suspicious 'Parking Transactions' in Poor PF... Did They Distort Delinquency Rates?
"If the 3rd Fund Uses the Same Method, It Is Not Desirable"

Financial authorities and the savings bank industry are expected to face increased difficulties in establishing real estate project financing (PF) normalization funds, which have been promoted as part of the smooth landing of real estate PF. Although the industry has raised more than 500 billion KRW in normalization funds through the first and second rounds since March, concerns have been raised that the non-performing loans sold by savings banks to the funds may be used as a temporary parking tool by the savings banks rather than actual sales. As financial authorities have begun reviewing the funds raised so far, the savings bank industry has decided to temporarily halt its own fund formation.

According to the financial sector on the 12th, the Financial Supervisory Service (FSS) plans to check whether so-called ‘genuine sales’ are being conducted for the non-performing loans included in the first and second PF normalization funds raised by savings banks, as well as the currently ongoing third fund. This is interpreted as an effort to examine whether the use of the funds raised so far to sell non-performing loans has distorted soundness and delinquency rates. The savings bank industry raised funds worth 33 billion KRW and 510 billion KRW in March and May, respectively, and is currently preparing an additional third fund.

An FSS official explained, “It is not that the funds raised so far have a problem in themselves,” but added, “If the third fund to be additionally raised follows the same pattern, it would not be desirable.”

In response, the Korea Federation of Savings Banks has entered a speed control phase by temporarily suspending its own normalization fund formation. A savings bank industry official said, “Due to the changed atmosphere, it is difficult to push forward with the third fund for the time being, so we plan to focus on non-performing loan auctions or independent sales for now,” but added, “However, fund formation will not be completely stopped and will be pursued in consultation with financial authorities as needed.”

In fact, among the second fund, it is known that about 230 billion KRW worth of non-performing loans were sold by the contributing savings banks at a ratio exceeding 80%. This means that some savings banks that invested in the fund sold non-performing loans they held in proportion to their investment amount.

Using this method, PF risks remain unchanged, but the financial institution’s soundness appears to improve. When a savings bank transfers non-performing loans to a PF fund, the classification of the loan’s soundness changes from ‘substandard or below’ to ‘normal.’ As a result, delinquency rates decrease, and even previously accumulated loan loss provisions may be reversed.

Ultimately, while financial institutions can reduce their soundness burden, the PF project risks remain with the invested fund. The bonds held by the fund do not require business feasibility evaluation, and if the project is non-performing, there is no need to sell through write-offs or auctions. This is why concerns are raised that the effectiveness of the restructuring efforts for PF projects worth 230 trillion KRW, currently underway by financial authorities, may be diminished.

Generally, the criterion for judging genuine sales depends on whether the fund manager has autonomous management rights. If the savings bank, as the fund investor, designates the fund’s management method and investment targets, it can be considered an illegal ‘original equipment manufacturer (OEM) fund’ under the Capital Markets Act. An OEM fund refers to a fund created by an asset management company at the request of a financial institution or other fund seller.

If conditions such as ‘preemptive purchase rights’ or ‘post-settlement’ are confirmed, exploiting the lack of transparency in decision-making within the fund, the controversy over genuine sales is expected to intensify. A financial investment industry official pointed out, “Since there is market optimism that the real estate market will revive due to expectations of interest rate cuts, it is possible that the secondary financial sector holding non-performing loans is making similar judgments,” adding, “If this turns into a formal means to buy time, the effectiveness of PF restructuring will inevitably decline.”