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Extended loan maturity feared to hurt banks' financial health

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Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during a meeting with CEOs of major banks to discuss extending loan maturity for pandemic-stricken businesses at the Korea Federation of Banks in central Seoul, Tuesday. Yonhap
Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during a meeting with CEOs of major banks to discuss extending loan maturity for pandemic-stricken businesses at the Korea Federation of Banks in central Seoul, Tuesday. Yonhap

By Yi Whan-woo

The government's extended grace period for loan repayments as a pandemic relief program is fueling concerns that banks will find it more difficult to figure out which clients are at risk of default.

Accordingly, the banks are anticipated to struggle more to manage their financial soundness for the next three years ― the maximum grace period as announced by the Financial Services Commission (FSC), Tuesday.

It is the fifth time that the government has extended the maturity on loans since April 2020 so as to buttress the cash-strapped self-employed and small and medium-sized enterprises (SMEs) struggling financially amid the COVID-19 pandemic.

So far, every six months, the grace period has been extended on the loans. The total amount of loans that have been extended is worth 362.4 trillion won.

Under the circumstances, multiple bank officials contacted by The Korea Times noted that their respective companies are capable of detecting default risks in advance but still find the repeated extensions of loan maturity burdensome.

"The government's measure is weighing on our efforts to manage financial soundness even if we're ready with solid risk management," an official said on condition of anonymity.

Another official said, "We may discover snowballing debts among our customers and increased risks associated with insolvency as the deadline for loan maturity approaches in coming years."

To manage risk, the lenders have been increasing allowances against possible uncollectible amounts as recommended by the government.

The total allowance from five major lenders ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― amounted to 1.34 trillion won ($940 million) as of the second quarter, compared to 465.2 billion in the first quarter, 428 billion won in April-June 2021 and 419.9 billion in January-March 2021.

"Nevertheless, the cost of increasing allowances suggests sacrificing investment opportunities, and therefore, it may not be so beneficial from a broader business perspective," a third bank official said.

The banks downplayed the possibility of being unaware of their business clients going bankrupt in the next few years.

"We assess financial statements of business clients at least once every year, and virtually all clients at risk of bankruptcy can be found in advance," another official said.

The risk management strategies also included a stress test, in which banks simulate the worst possible business environment, such as the ones during the 1997-98 Asian financial crisis and the 2008-09 global financial crisis, and see if they can endure relevant challenges.

"The challenge coming from the repeated extension of loan maturity is far better than what we went through in the two past financial crises," another official said.


Yi Whan-woo yistory@koreatimes.co.kr


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