FSC seek penalties for foreign banks

Foreign banks operating in Korea face disciplinary action stemming for their illicit lending practices against small and medium enterprises (SMEs), officials said yesterday.

The Financial Services Commission (FSC), the country’s top regulator, is pushing for measures against Citibank Korea for applying lending terms to SMEs that give the bank an advantage, FSC officials said.

The practice, known as “uncommitted loan facility,” allows the lender to retrieve existing loans even if a borrower doesn’t exhaust a predetermined borrowing limit.

Since the terms of loan extension are not set, there are fewer credit risks for the lender.

In 2007, banks pushed for the introduction of the lending facility, which goes against the country’s banking act, but the antitrust watchdog didn’t approve the system, saying it gives banks a unilateral right to withdraw loan contracts.

The officials said the FSC will likely give an institutional warning to Citibank Korea and a cautionary warning to Ha Yung-ku, head of the Seoul unit of U.S. banking giant Citibank, who is set to begin his fifth consecutive term next month.

The move on Citibank came on the heels of a similar penalty imposed by the FSC on Standard Chartered Bank Korea on Friday. The Financial Supervisory Service (FSS), the executive body of the FSC, found that “uncommitted loan facility” applied to a total of 6,000 contracts.

“The two banks virtually forced smaller firms to sign the contract with an uncommitted loan agreement clause wedged into it,” said an FSS official.

Foreign banks here have often been scrutinized by authorities as they tend to refrain from SME lending and focus on the mortgage business or invest in blue-chip corporate bonds, which warrant safer returns and enable them to pocket hefty dividends for their shareholders.

Their strategy draws a contrast to that of local competitors to increase SME lending in order to be in step with the new Park Geun-hye government that has vowed to help smaller firms. Last year, local banks increased SME lending by 30 trillion won, while the two foreign banks recouped 600 billion won from such loans. Citibank and SC Bank reduced SME lending by 4.3 percent and 4.8 percent respectively in 2012, according to the regulator.

Yonhap