SEOUL: Savings banks, which account for 2.8 percent of South Korean financial services industry, have been emerging as a major risk to Asia's fourth-largest economy.
Their heavy exposure to the slumping construction industry has been souring and exacerbating liquidity shortages at builders, with eight debt-hit savings banks under a temporary business suspension since earlier this year.
The following are questions and answers to potential risks stemming from the thrifts and subsequent policy efforts.
As of the end of 2010, savings banks held 12.2 trillion won in real estate project financing (PF) loans, a quarter of which were overdue, versus 10.6 percent at end-2009.
Kim Seok-dong, chairman of the Financial Services Commission, an industry watchdog, told lawmakers on Thursday that half of the outstanding PF loans might be bought by Korea Asset Management Corp (KAMCO). The state debt clearer is set to spend 3.5 trillion won buying PF loans from savings banks this year.
Between 2008 and 2010, KAMCO had bought a combined 6.2 trillion won worth of real estate PF loans from savings banks. Some of them will start to come due later this year, with the first tranche of 330 billion won due in December and another 1.1 trillion won maturing next March.
Separately, a total of 201 billion won in subordinated debt issued by savings banks led by Solomon Savings Bank are falling due this year, research by domestic ratings agency NICE Rating showed.
Forty savings banks had an outstanding 1.4 trillion won in subordinated debt as of end-December, 2010, equal to half of their capital.
Financial regulators and analysts say there is only a slim chance of savings banks experiencing a sudden liquidity squeeze. More than 90 percent of their customers have deposited up to 50 million won at those banks, or the maximum that the government can guarantee.
However, more than 90 percent of the deposits have less than one-year maturity, signalling they could flee if concerns about the banks financial health resurfaced.
NICE Rating said tightened regulations over subordinated debt sales and cooling interest would make it difficult to refinance them, thus destabilising their financial status.
Tougher rules will further limit savings banks' exposure to the tepid construction market. The government will slap ceilings on property project financing loans as a proportion of their capital and set limits on investment in risky assets such as property funds and offshore funds.
Commercial lenders, led by KB Financial Group, may be required to put up money for a new bad bank aimed at buying troubled PF loans from savings banks or to take them over, ahead of presidential and parliamentary elections in 2012.
Heightened competition in the consumer financing market, fuelled by banks and credit card companies, has driven savings banks to real estate-related loans since 2006, riding on the booming construction market. PF loans make up about half of their total lending.
The country's 105 savings banks, with a combined assets of 87 trillion won, swung to a loss of 472.6 billion won in aggregate in the fiscal year ended June 30, 2010. Their return on assets slipped into the red in 2008 and 2009.
Their average deposit growth in the past three years was 13.4 percent compared with 6.5 percent for commercial banks.
Policymakers are worried about a lack of fresh business models for savings banks, as bigger rivals have already made their inroads into the niche, small-loan markets.
The legislative move by the ruling GNP to set limits on borrowing rates may push savings banks to the brink by sending some of their customers to the underground market.
Regulators may defer the introduction of IFRS accounting system for savings banks from July to relieve their burden on putting aside charges against their PF loans.
They will also strengthen supervision of their operations and increased the frequency of public disclosures to a quarter from half a year.
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