Banks clear out bad debt to meet year-end targets

Korean banks should clear nearly 4.5 trillion won ($4.14 billion) in bad loans by the end of this year in order to meet regulatory requirements, data showed yesterday.

The amount of non-performing loans held by local banks reached 21.9 trillion won as of the end of September, according to the data by the Financial Supervisory Service (FSS) and banks.

A non-performing loan refers to debts that have been overdue for more than three months and thus put creditors at a high risk of being unable to retrieve the interest or principal.

The total amount of bad loans is likely to increase to as much as 22.7 trillion won, as latest figures on bank loans extended to smaller firms showed a high risk of default. On Wednesday, the regulator said that 97 cash-strapped SMEs are subject to restructuring.

Given that, banks’ bad loan ratio will likely rise to 1.62 percent from 1.56 percent as of end-September, leaving banks with about 4.5 trillion won worth of bad debts that need prompt clearance before the end of this year.

The adequate ratio target required by the regulator is 1.30 percent.
However, banks said they have been facing difficulties with clearing bad debts due to failures in bidding amid a sluggish economy.

“Banks can either sell them off or increase their total lending to reduce the bad loan ratio, but if they see more fresh defaults, it’s inevitable that the amount to be settled will rise,” said an FSS official said.

Woori Bank, the flagship unit of Woori Finance Holdings, plans to sell bad loans worth 270 billion won by the end of this year, with another major player, Kookmin Bank, recently having sold off 430 billion won worth of bad loans.

Their bad loan ratio stood at 1.87 percent and 1.75 percent each as of the end of September, according to the FSS.

Yonhap