Overinflated Sale Prices and Rents Lead to Excessive Loans... Insufficient Control Mechanisms in the Banking Sector

Banking Sector SME Real Estate Collateral Loan Internal Control Operation Results
124 Cases of Excessive Loans and 492 Cases of Internal Regulation Violations Discovered

It has been found that the banking sector lacks sufficient control mechanisms to verify when business operators attempt to obtain excessive loans by inflating sale prices or rental fees.

According to the results of the "Internal Control Operation Status Inspection for Preventing Accidents in SME Real Estate Secured Loans in the Banking Sector" disclosed by the Financial Supervisory Service (FSS) on the 24th, banks conducted their own sample inspections on 10,640 suspicious transactions involving excessive loans and internal regulation violations from April to June. They discovered 124 cases of excessive loans compared to collateral value and 492 cases of internal regulation violations related to credit handling, totaling 616 suspicious transactions. This investigation was based on a sample of loans to individual business owners and SMEs with a high likelihood of accidents.

Many banks identified deficiencies in their operational methods and IT systems designed to control inflated appraisal values or excessive loan limit calculations. Improvement plans for these shortcomings have also been prepared. It was confirmed that in many banks, loan officers at branches can designate appraisal firms, resulting in insufficient segregation of duties to prevent unfair valuation by loan officers. Some banks have introduced segregation of duties systems but operate them loosely, indicating cases that require supplementation.

Some banks use appraisal values as collateral values without verification even when these values significantly exceed actual transaction prices, leading to excessively calculated loan limits. Many banks lack IT systems capable of verifying and controlling even when loan officers apply high loan-to-value ratios (LTV). There were also numerous cases where verification of lease status documents and on-site investigations were neglected, resulting in under-deduction of senior lease deposits.

Branch self-inspections are often conducted superficially or vary greatly depending on the personal capabilities of the self-inspection managers, reducing the effectiveness of follow-up inspections, which was also identified as an area needing improvement.

The FSS plans to thoroughly review the results of ongoing secondary detailed investigations into suspicious excessive loan transactions and take action against illegal or improper conduct. To enhance the internal control system for credit, a task force (TF) for revising the model regulations will be operated to promote institutional improvements on common issues across all banks.

An FSS official stated, "The FSS will provide individual feedback to each bank on the review results of their submitted internal control improvement plans, specifically guiding areas that require supplementation and continuously monitoring the implementation status of these plans. We also plan to strengthen supervision and inspections to ensure that banks’ accident prevention systems effectively operate to prevent inflation of transaction prices and appraisal values and control excessive loan limit calculations."