"Unfair Loans and Embezzlement Incidents, Severe Distrust"... Financial Supervisory Service to Establish 'Credit Best Practices'

Banking Sector Credit Process Improvement TF Kickoff Meeting Held
Strengthening Verification Procedures for Key Credit Documents, Enhancing Collateral Valuation and Verification Processes

[Image source=Yonhap News]

Amid a series of credit incidents in the financial sector, the Financial Supervisory Service (FSS) plans to promote institutional improvements based on the vulnerabilities identified in the credit process during inspections and the improvement plans submitted by banks, including strengthening the verification procedures for important documents and improving the procedures for collateral value assessment and verification.

On the 3rd, the FSS held a kickoff meeting for a task force (TF) to improve the credit process, chaired by Deputy Director Park Chung-hyun in charge of banks, with 11 banks and the Korea Federation of Banks participating. They discussed the need for common improvements in the credit process across the banking sector and the tasks for improvement. After the kickoff meeting, the FSS will operate a working group led by the head of the Bank Inspection Division 1, conduct practical discussions in September and October, prepare a revision draft, and plan to amend the model regulations within the year.

Deputy Director Park said, "We are taking seriously the growing distrust in the banking industry due to consecutive financial accidents such as improper loans and embezzlement," adding, "To restore trust, it is time for the FSS and the banking sector to share a common understanding of the situation and unite our efforts." He emphasized the growing need for a joint response from the banking sector as the background for promoting the credit process improvement TF, mentioning recent changes in the nature of financial accidents and the weak internal control levels in branch credit operations.

The FSS plans to first pursue ▲strengthening the verification procedures for important credit documents ▲improving the procedures for collateral value assessment and verification ▲reinforcing the verification of the authenticity of lease contracts and supplementing post-inspection standards for misuse of funds beyond their intended purpose. The FSS has determined that there have been multiple incidents recently where credit was improperly overextended based on false commercial lease contracts related to commercial property collateral loans.

Verification of important credit documents will be improved to undergo stricter procedures, such as formalizing the principle of collecting public MyData when requesting income and employment documents and strengthening the verification of important documents. Documents accessible via public MyData should be obtained through public MyData, and if not available, public documents submitted by the customer should be used first, followed by private documents submitted by the customer.

Additionally, since there have been cases where appraisal was conducted based on false sales contracts at the original sale price despite discounted sales, resulting in overvaluation of collateral and increased loan limits, the FSS will also strengthen the appropriateness and verification procedures of collateral value assessment at branches. The FSS plans to prepare improvement measures such as strengthening internal verification procedures for vulnerable collateral like long-term unsold properties, expanding head office reviews, and enhancing head office monitoring of branch self-assessments.

Furthermore, to prevent improper loans made without verifying the authenticity of lease contracts to evade rental business interest repayment ratio regulations, and to stop cases of embezzlement where funds were used for purposes other than the loan execution, the FSS intends to establish procedures to confirm the fulfillment of lease contracts, create processes to respond when facts such as vacancies different from the lease contract are discovered, and supplement standards for checking misuse of funds beyond their intended purpose.

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

In addition, the FSS plans to strengthen the inspection of the credit process during regular examinations along with institutional improvements and to take strict measures against executives and employees responsible for financial accidents according to laws and principles. However, Deputy Director Park requested special attention to compliance education so that frontline employees can perform credit operations based on high ethical standards and a sense of responsibility, noting that there are limits to preventing illegal and improper acts through institutional supplements or post-sanctions alone.