(2nd LD) Sweeping revamp stares smaller firms in the face

(ATTN: UPDATES with additional remarks by top regulator on home-backed lending from
para 10)
SEOUL, July 15 (Yonhap) -- South Korean banks will carry out a sweeping revamp of
ailing small and mid-size companies in an effort to keep their potential defaults
from denting the slumping economy, the financial watchdog said Wednesday.
The restructuring drive comes after lenders completed a comprehensive review of
the credit risks of 861 small and medium enterprises (SMEs) with bank loans
between 5 billion won (US$3.9 billion) and 50 billion won.
Under the restructuring measure, creditor banks will weed out 36 troubled firms
and reschedule debts at 77 companies, the Financial Supervisory Service (FSS)
said.
"The corporate revamp should be carried out thoroughly," Kim Jong-chang, governor
of the FSS, told a press conference. "The policy to provide support to smaller
firms suffering from a temporary liquidity squeeze will be maintained, but there
is also the need to wisely distribute limited resources to sectors in need."
Bank lending to such firms reached 1.6 trillion won, while the revamp is likely
to force lenders to put aside about 280 billion won in additional loan-loss
reserves, it said.
The government has urged local creditor banks to accelerate restructuring of
teetering companies as a possible chain reaction of business failures could sap
the financial health of the banking sector, undermining a fragile economic
recovery.
The FSS said it will advise creditor banks to assess the financial health of SMEs
for which bank lending surpasses 3 billion won by the end of September. It said
about 10,000 companies would be on the list for the review.
The move follows a 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 to enhance their financial
health.
In late March, lenders decided to end support to five smaller ailing companies
and reschedule debts at 15 construction firms and shipbuilders to keep potential
defaults from denting the slowing economy, following a similar move in January.
Meanwhile, Kim said the watchdog plans to closely monitor home-backed lending and
could consider further stiffening related rules if housing prices continue to
rise.
The regulator strengthened its grip on home-backed regulations last week in a bid
to prevent a surge in the loans from denting local banks' financial health.
The FSS tightened rules on the loan-to-value ratio (LTV), and now allows banks to
extend mortgage loans amounting to just 50 percent of the value of a Seoul-area
residence, down from 60 percent.
But regulations on the debt-to-income ratio (DTI) were left untouched. Currently,
borrowers' annual repayment of interest and principal should not exceed 40
percent of their yearly gross income.
"If housing prices continue to rise, the watchdog could consider stiffening rules
on the LTV further," Kim said. "But it would not be easy for the watchdog to set
a ceiling for how much each bank could extend for mortgage lending."
His remarks come as bank mortgage lending surged by a monthly average of 3
trillion won this year, similar to levels seen in 2006 when lenders were
scurrying to extend home-backed loans.
In a bid to curb soaring housing prices in 2006, the government stiffened
regulations on home-backed lending and imposed heavy taxes on multiple home
owners.
The FSS is also mulling toughening regulations on home-backed loans extended by
non-banking institutions in a bid to stem a possible overheating of the housing
market.
sooyeon@yna.co.kr
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