Korean banks set to revamp ailing smaller firms

By Kim Soo-yeon
SEOUL, June 16 (Yonhap) -- South Korean banks plan to assess the financial health
of teetering smaller firms by the end of next month in an effort to prevent
possible defaults from weighing on the economy, industry sources said Tuesday.

According to sources, creditor banks plan to review credit risks of about 10,000
small- and medium-sized enterprises with debts of less than 50 billion won
(US$39.5 million) no later than the end of July in a series of bank-led moves to
overhaul struggling firms.
The move follows the recent decision by local banks to reschedule debts or end
support for 33 larger companies. In late May, nine liquidity-squeezed large
business groups signed agreements with banks calling for enhancing their
financial health.
"As banks completed assessing the financial health of bigger companies, they are
turning their eyes to smaller firms," an official at a creditor bank said.
The corporate revamp comes amid growing concerns that a possible chain reaction
of business failures could undermine the soundness of the banking sector, dealing
a harsh blow to the economy that is now showing signs of improvement.
Since the collapse of Lehman Brothers Holdings Inc. in late September, the
government has urged local banks to expand credit to smaller companies facing a
liquidity squeeze by providing state loan guarantees.
Korean lenders have become wary of extending loans to smaller firms due to
concerns over their financial soundness, as problem loans pile up amid the
slumping economy and a corporate restructuring drive.
But as the local economy shows budding signs of improvement and as funding
crunches ease, some are raising questions about the effectiveness of
indiscriminate support for SMEs.
In late March, lenders decided to end support to five smaller ailing companies
and to reschedule debts at 15 construction firms and shipbuilders following a
similar move in January.
South Korea is beefing up measures to help local banks cushion the impact of the
corporate overhaul drive. The government will spend 20 trillion won out of a 40
trillion won restructuring fund to buy bad debts and purchase assets from ailing
companies this year.
It also plans to establish a special fund to help even healthy financial firms
recapitalize as a backup measure to cushion rising defaults and the impact of the
economic downturn.
sooyeon@yna.co.kr
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