KDB criticized for handling of STX and Dongbu

Korea Development Bank (KDB), a state-run institution in charge of supporting businesses undergoing restructuring and funding various public projects, has come under fire for its lax supervision of companies for which it is the main creditor.

According to the financial industry yesterday, KDB, the main creditor of cash-strapped Dongbu Group and STX Group, is being criticized for its loose oversight of the companies and for issuing them loans in an unfair manner.

The Financial Supervisory Service (FSS) is reportedly planning to punish the state-run bank after investigating it twice carrying out a special probe in May.

In its latest investigation, the FSS found that KDB raised the credit levels of STX affiliates for no apparent reason and gave a 300 billion won ($294 million) loan in 2009 to STX Offshore and Shipbuilding even though the company had a high risk of accounting fraud.

“The FSS is currently deliberating the result of the probe into the unfair loan issuance by KDB,” said an FSS official. “We will notify the bank right after the deliberation process is complete.”

Kang Duk-soo, STX Group’s former chairman, was indicted in May for accounting fraud adding up to about 2 trillion won.

Kang said on the first day of his trial on Friday that he didn’t orchestrate the scheme and wasn’t even aware of it. The prosecutors accused him of ordering the shipbuilder’s operating profits to be inflated in its financial report for the period from 2008 to 2012.

For its part, the KDB said the loan was issued in a legitimate way based on financial reports from the company.

“The bank decided to provide the loan based on a financial report written by the company’s auditor,” a KDB official said. “When the authority investigated the bank twice last year, they found no problems.”

The official also said the bank considered the group’s influence on the domestic market when it decided to expand its financial support.

A former KDB executive was sent to oversee an affiliate of the group, the financial authority also found.

“As the main creditor of a business that is under massive restructuring with huge financial support, it is right to dispatch its employees to the company to see whether it is carrying out its plan well or not,” said Lee Jung-sung, head of public relations at KDB.

The FSS says KDB isn’t involved enough in Dongbu’s restructuring, either.

The “Dongbu package,” which refers to the combined sale of Dongbu Steel’s Incheon plant and Dongbu Power Dangjin Corporation, was unfit for the market and the deal has been a failure, insiders say.

After steelmaker Posco decided not to buy the package, KDB and other Dongbu creditors then decided to supervise the group’s steelmaker in order to speed up its debt clearance process.

However, industry insiders are skeptical of the creditors’ abilities. KDB proposed the Dongbu package sale and asked Posco to buy it.

“It seems like the KDB failed to read the market,” said a steel industry insider.

BY SONG SU-HYUN [ssh@joongang.co.kr]