Savings banks' massive illegal loans revealed

(ATTN: ADDS penultimate para; UPDATES para 4, last para) SEOUL, Sept. 19 (Yonhap) -- South Korean savings banks were discovered to have extended illegal loans to their major shareholders, financial regulators said Monday, angering depositors and fueling anxiety following the suspension of seven local savings banks. The data comes a day after the Financial Services Commission (FSC), the country's financial watchdog, suspended the business operations of seven savings banks for six months, citing their insufficient capital adequacy ratios and heavy debts. The suspended institutions, including major players such as Tomato and Jeil whose assets exceed 3 trillion won (US$2.7 billion), were singled out by the Financial Supervisory Service, the FSC's executive body, after a seven-week inspection of 85 local savings banks. The focus of the inspections were to see if the savings banks kept their debt under control and maintained capital adequacy ratios as stipulated by the Bank for International Settlement (BIS) standards. A number of those savings banks inspected, including three that were suspended, were found to have extended illegal loans to key shareholders, ranging from tens of billions of won to as much as hundreds of billions of won. Officials declined to disclose the names or number of banks involved. One savings bank extended loans worth 640 billion won, or nearly 70 percent of its total assets, to two urban development projects virtually linked with the savings bank, according to sources. The inspection results showed that more than 90 percent of the savings banks' irregularities exceeded the legal range. According to local finance industry law, a savings bank is not allowed to extend loans worth more than 20 percent of its equity capital to a single borrower. The financial watchdog, however, said it did not discover any special purpose companies (SPC) used for illegal loan extensions as was the case in the Busan Savings Bank scandal. "We applied a strict standard during the inspection," said an FSS official in a briefing. "We tracked down bank accounts and found no forms of SPCs," and added the financial watchdog has no right to directly investigate SPCs. Financial regulators said they plan to ask prosecutors to investigate the cases as soon as possible, but declined to fix a schedule. On Sunday, regulators said they would conduct an in-depth probe into irregularities at the seven savings banks that were suspended.