Financial Supervisory Service Evaluates Management of 4 Savings Banks with High Delinquency and Non-Performing Loan Ratios
Field Inspection of Small and Medium Capital Companies with Double-Digit Delinquency Rates, Receiving 'Improvement Plans'
Target to Finalize Real Estate PF Project-Specific Handling Plans by Month-End
Interpreted as Preemptive Measures Ahead of Full-Scale Restructuring
Financial authorities are continuing to exert stronger pressure on management improvement for the secondary financial sector, where delinquency rates and non-performing loan (NPL) ratios have surged due to prolonged high interest rates and the fallout from real estate project financing (PF) defaults. With plans to finalize handling strategies for each real estate PF project by the end of this month, this is interpreted as a preemptive measure aimed at minimizing market shocks and increasing the likelihood of a smooth landing ahead of full-scale restructuring.
According to financial authorities on the 23rd, the Financial Supervisory Service (FSS) conducted on-site inspections over three days from the 12th to the 14th, focusing on small and medium-sized capital companies, and has now launched a second round of inspections targeting savings banks and capital companies with inadequate handling plans for PF projects. Additionally, four savings banks with relatively poor asset soundness indicators will undergo management evaluations within this month. The FSS had also conducted management evaluations on three savings banks in June.
The management evaluation for savings banks is a supervisory procedure applied to financial institutions whose soundness indicators fall below a certain threshold. Savings banks with delinquency rates and NPL ratios in double digits during the first half of this year are known to be subject to this evaluation. The results are categorized into five grades from 1 (excellent) to 5 (risky) across various criteria such as capital adequacy, asset soundness, and management capability. If asset soundness and capital adequacy are rated grade 4 (vulnerable) or lower, the savings bank may be subject to timely corrective actions. These corrective actions are classified as recommendations, demands, or orders, requiring measures such as disposing of non-performing loans or increasing capital.
Earlier, the FSS also demanded that about ten small and medium-sized capital companies inspected on-site improve asset soundness indicators such as delinquency rates by year-end through the sale, write-off, or auction of non-performing loans (NPLs). Some capital companies with delinquency rates in the double digits were reportedly required to submit detailed plans to reduce their delinquency rates below 10%.
A senior official from a capital company explained, "Financial authorities have held sector-specific meetings, urging savings banks and large specialized credit finance companies to manage asset soundness and take preemptive measures against real estate PF defaults for a smooth landing," adding, "It appears they are pressuring companies with double-digit delinquency rates to submit improvement plans following on-site inspections."
The FSS’s proactive measures stem from the deteriorating asset soundness of the secondary financial sector, including savings banks and credit finance companies. The delinquency rate of savings banks has risen from around 3% in 2022 to over 8% by the end of June this year, due to accumulated defaults in household loans and construction real estate loans. In particular, the delinquency rate for real estate PF loans at savings banks reached about 11%, while land-secured loan delinquency rates exceeded 20%.
As of the end of March, one in five capital companies had delinquency rates exceeding 10%, but they are struggling to resolve these through NPL disposals and other measures. Although the Korea Federation of Credit Finance Associations has been promoting joint sales of individual NPLs since the first half of the year, participation has been low, especially with large companies opting out, causing slow progress. With liquidity shortages and rising delinquency rates expanding operating losses, the situation could threaten the survival of these companies once the handling of distressed PF projects intensifies.
Meanwhile, as announced at the third real estate PF smooth landing inspection meeting, restructuring and auction plans for each PF project must be finalized by the end of August. The FSS has already collected information and handling plans, including restructuring and auctions, for projects classified as cautionary or at risk from financial companies, and has conducted on-site inspections and management interviews for projects with insufficient plans.
The financial sector expects auction procedures for distressed projects to begin in earnest from September. In its July report titled "Key Monitoring Points for the Second Half," NICE Credit Rating analyzed that "if the new real estate PF project viability evaluation criteria by financial authorities are applied in the second half, a significant number of real estate PF projects will be recognized as distressed."
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