Korean government to adopt re-structuring, extend support to financially weak companies

The government of Korea has sought an attempt to adopt re-structuring method to eliminate sick companies and extend support to those that are facing temporary financial crunch. This will help bolster the productive efficiency of the companies but pose threat to their economic viability, both at the micro as well as macro levels.

On the other hand, such a step would infuse concern, in the form of negative consequences, leading to accumulation of non-performing loans and lay-offs. However, this seems manageable in the short run. It has been noted that the companies possessing high risk structure and exposed to financial threats are mainly concentrated in the shipping, ship-building, construction, steel and petrochemicals sector.

Following the government’s intervention since the 2008 financial crisis to encourage marginal companies and their creditors to restructure debt on voluntary basis, the corporate debt-to-asset ratio across all industries remained at a decent 57% pct as against 81 pct seen before the Asian financial crisis.

The majority of loans extended to the poor performing sectors of the economy have been held by state-run banks as the Korea Export-Import Bank and the Korea Development Bank. Corporate banks’ exposure of loans to these sectors stands negligible. According to Fitch’s estimates, sectors such as shipping and ship-building account for roughly 70-75 pct of the total NPL.

"Furthermore, restructuring may not be conducted at a fast pace. A plan regarding how to recapitalize the policy banks hasn’t been finalized. The government calls for the BOK to inject capital, but the BOK appears cautious," said DBS in a research note.

Governor Kim Chong-in in his recent speech mentioned that public-sector banks should concentrate on delivering loans that have a mortgage-base, rather than directly injecting money into the business. This will successfully help avert bad loans and strike a way to compensate laid-off workers. However, the relevant bill still awaits approval in the parliament after the April elections.

"The upcoming political development and resultant impact on policy implementation needs to be closely watched," DBS said in its recent report.