Credit crackdown

Banks are set to use their clout on companies that backpedal or ease off when it comes to implementing their restructuring programs. They plan to refuse new loans to companies that are slow in restructuring their debt and demand payment of debt when it comes due.

Creditors grant debt extensions and provide refinancing options to distressed companies and those on the brink of insolvency in exchange for promises that these firms will fix and salvage their operations to generate future earnings and eventually repay their debt.

Despite being thrown a life preserver by banks, though, many of these companies were found to have been taking a lackadaisical approach to restructuring and essentially throwing away their only chance of a revival.

We urged sweeping and quick corporate restructuring when the global financial crisis began to take a toll on Korea’s economy late last year. Sorting out bad debt from good and enforcing restructuring on weak companies is a prescription aimed at preventing the economic meltdown from extending to the broader financial and corporate sectors.

Financial creditors have now conducted across-the-board credit evaluations of their corporate debtors and shifted away from companies who are in danger of not being able to repay their loans. Of 54 companies with more than 50 billion won ($43 million) in debt that require restructuring, 12 failed despite rescue efforts, with eight of them falling into court receivership.

The rest have not even mapped out their reform outlines.

Among companies with loans totaling less than 50 billion won, nine out of 77 that need to restructure bypassed debt workout plans. Two of them went under court management, while the rest failed to come up with reform programs.

Banks took oversight action only after financial authorities warned of taking punitive measures on creditors that were lenient with their corporate debtors when it comes to restructuring. Corporate restructuring is essential to sustain the wellness of the financial system, but more importantly it’s necessary to rein in the spread of insolvency among banks. Banks must act on their own will to keep up the health of their financial assets by operating routine credit monitoring and ensuring the fitness of their corporate clients.