Lending cap for savings banks

Updated May  27, 2011

By Kang Seung-woo

Savings banks will have new caps on their lending from the second half of this year as the financial authorities are telling them to get on a better financial footing.

According to the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), they are set to come up with new credit guidelines for lending in July and the limits are expected to be 10 billion won for corporate entities, 3 billion won for self-employed businesses and 600 million won for individual borrowers.

Currently, the lending limit, regardless of the entity, is set at 8 billion won, but the financial regulators are likely to differentiate it to put the brakes on secondary banks’ reckless lending and prevent their loans from going sour.

According to them, the credit ceiling of corporations could remain at the current level or increase to 10 billion won, while borrowers from self-employed businesses may see it decline to 3 billion won.

The financial authorities will allow savings banks to reduce their maxed-out lending gradually by giving them a grace period in order to prevent any confusion arising from the new regulations.

"As we have found that a large number of savings banks have lent money without proper verification of credit risk, there are concerns over potential consequences," said an official from the financial authorities.

In a related move, the Korea Federation of Savings Banks (KFSB) recently discussed the new lending limit with industry officials.

Indiscriminate lending by savings banks for project financing (PF) has crippled the secondary financial players amid prolonged sluggishness in the housing market and the FSC has suspended eight savings banks due to capital shortages since January.

As a result, it has abolished a favorable lending system, so called the "8.8 club," for savings banks whose capital adequacy ratio is more than 8 percent and the non-performing ratio is below 8 percent in its efforts to prevent another capital shortage. If savings banks meet the standard, they were allowed to extend loans of more than 8 billion won to a single client.

In addition to the new lending ceiling, the FSC is considering introducing a legislation to adopt a system that requires a builder’s own capital to account for more than 20 percent of business funds when applying for PF loans. Right now it is only a recommendation by the FSC.

But the savings bank sector is complaining about the move for fear of losing customers due to stricter rules.

"We have found through simulation tests that savings banks have to lower their assets used in loans by 10 percent," said an official of a savings bank. "The financial authorities need to help savings banks seek other means of survival."

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