[Exclusive] Joseonsa Guaranteed Banks Will Not Be Held Responsible Even If They Become Insolvent

Export-Import Bank Requests 'Shipbuilding RG Exemption' from Ministry of Economy and Finance
"We Will Listen to Industry Opinions and Prepare Improvement Measures"

The government will grant 'exemption' benefits to banks that provide guarantees to shipbuilders. This means that financial institutions will not be held responsible even if defaults occur in the future, so they will not hesitate to provide guarantees essential for ship orders.

According to related ministries including the Ministry of Economy and Finance and the Financial Services Commission on the 27th, financial institutions such as the Export-Import Bank recently requested Choi Sang-mok, Acting Prime Minister and Minister of Economy and Finance, to grant exemption benefits for Refund Guarantee (RG) issued by banks to the shipbuilding industry. They asked for support so that financial company employees can actively issue RGs without fear of sanctions.

RG is a system where a third party such as a bank compensates for damages if a shipbuilder fails to build a ship within the set deadline or goes bankrupt. Usually, when a shipowner orders a ship from a shipbuilder, a certain amount is paid as an advance payment. If the shipbuilder fails to build the ship, the shipowner loses the advance payment, but with an RG, they can recover it from the guarantor. Therefore, most shipbuilding contracts require an RG. If RG issuance is refused, the order contract may be halted.

Although the government is increasing financial support to revitalize the shipbuilding industry, the scale of RGs remains small. According to the Financial Services Commission, as of December last year, RGs for the three major domestic shipbuilders amounted to about $6.5 billion, slightly exceeding half of the total limit of $10.1 billion. For medium-sized shipbuilders, only two companies, Daehan Shipbuilding and K Shipbuilding, received RGs totaling $790 million. In particular, small shipbuilders are actively seeking new markets and requesting RG issuance, but financial institutions are reluctant to issue RGs citing lack of experience.

Banks insist that exemption is essential for RG issuance to be activated. The small and medium-sized shipbuilding industry expanded excessively during the shipbuilding boom in the mid-2000s, but faced difficulties in orders due to the global financial crisis. As competition intensified, some companies engaged in low-price orders, resulting in several companies becoming insolvent and entering workout programs in the early 2010s. Financial institutions that issued RGs to shipbuilders suffered large losses, and their employees faced audits and disciplinary actions. Therefore, they say that there must be a guarantee that they will not be held responsible even if they issue RGs to small and medium-sized shipyards in order to actively issue RGs.

The government also sees merit in the financial institutions' claims. A Financial Services Commission official said, "We can consider exemption reviews," adding, "We are looking at exemption parts so that (financial institutions) actively engage in RG issuance." A Ministry of Economy and Finance official also said, "We are in the process of listening to industry opinions and preparing improvement measures to further expand RG issuance to small and medium-sized shipbuilders."

Meanwhile, the last time the government granted exemption benefits to financial companies was in 2020 during the COVID-19 pandemic. At that time, the government reorganized the exemption system to support companies affected by COVID-19. The government established regulations stating that related work would not be sanctioned unless there was intentional or gross negligence even if defaults occurred.