The Korea Development Bank (KDB) Financial Group and the Korea Finance Corporation established by former President Lee Myung-bak and his government, currently in the process of privatizing KDB, will merge. The current President Park Geun-hye and her government are calling off the privatization and putting KDB in charge of Korean financial institutions.
Short-term loans and export insurance carried out by the Export-Import Bank of Korea and Korea Trade Insurance will be reduced and opened to public financial businesses. The Export-Import Bank and Korea Trade Insurance, along with KDB’s shipping finance-related organization and personnel, will combine and relocate to the Busan Shipping Finance General Center.
On August 27, the Financial Services Commission (FSC) announced its finalized plans to redistribute financial roles as mentioned above. FSC submitted the KDB reformation bill to the National Assembly session last September, which, if passed, will release an integrated KDB in July of next year. However, there will be chaos and opposition in the process of getting rid of a group only 4 years after having created it. In addition, there is some opposition to the bill within the party, and controversy at the session is anticipated.
KDB Disintegration, Selling Affiliates
KDB will face the biggest changes through the financial reformation led by FSC. The KDB Financial Group is actually disassembling.
Korea Finance Corporation, separated from KDB in 2009 to be in charge of political finance during the process of KDB privatization, will be merged back together with Korea Development Bank.
Venture investments and onlanding (indirect loans for small to mid-sized enterprises using private financial corporation support), which used to be carried out by the Korea Finance Corporation, will now be handed over to KDB. Financial Stability Funds supporting the quick take-over of company loans will also be transferred from the Korea Finance Corporation to KDB. Any foreign business-related assets, debts, and personnel will be transferred to the Export-Import Bank of Korea.
KDB Finance Holdings will disassemble as well. Affiliates KDB Capital, KDB Asset Management, and KDB Life Insurance will be sold. KDB Infra will not be sold, since it was considered to fall in the policy finance sector. Daewoo Securities, which overlaps with Woori Investment & Securities, will not be sold either. An integrated KDB will expand its business to industrial restructuring, corporate bonds issue support, venture business financial support, and others.
Reduction of Public Areas for Export-Import Bank, Korea Trade Insurance, KDB
Despite the criticism that the Export-Import Bank and the Korea Trade Insurance belonging to the Ministry of Strategy and Finance and other departments overlap with other organizations, these organizations survive. This reflects the President’s decision to take the beneficiary’s opinions into consideration. Short-term credit loans from the Export-Import Bank will drop to 40% from the total of 77% by 2017, and short-term insurance from Korea Trade Insurance will be reduced to less than 60%.
To justify the regulations on soundness, Korea Trade Insurance’s funds will be adjusted to 50-60 times higher, and the Export-Import Bank will receive a credit offering limit waiver when participating in large-scale foreign projects.
Rather than establishing a shipping finance corporation, likely to cause trouble, the Export-Import Bank, Korea Trade Insurance, KAMCO, and KDB, along with 100 employees from the Korea Finance Corporation’s shipping finance division, will operate in Busan as a shipping finance general center.
Additional solutions such as shipping bond guarantees, manufacturing finance size expansions, and mortgage value determination guarantees by the Korea Finance Corporation have been proposed. A suggestion to establish a Shipping Guarantee Fund using public resources will be reviewed by the first half of next year through a research sector. The establishment of this controversial fund has virtually been postponed.
KDB privatization will be paused as well. Instead, KDB will provide traditional small to mid-size enterprise business loans, combined with the investment functions of KDB Capital and other affiliates to activate investment and loan finances.
The Korea Credit Guarantee Fund and Korea Technology Finance Corporation will also maintain their original systems. A way to activate the joint guarantee investments, as well as starting an “investment option guarantee policy” to share profits by turning guarantees into investments, are in the works.
Reduction of Loan Shopping - Inevitable Policy Finance Support Amount Reduction
The government decided to reduce sectors overlapping with public finance companies in the process of reforming financial institutions. Financial institutions will focus on the Creative Economy, centered on supporting small and mid-sized venture enterprises. The FSC anticipated that this will reduce below-standard businesses getting support by exploiting overlapping financial institutions called “loan shopping.”
However, this may lead to necessary support reducing as well. The fact that the Export-Import Bank stopped providing credit loans to large export companies and gradually reduced them for small to mid-size companies is an example. With the short-term export insurance dominated by Korea Trade Insurance opening up to the public market, insurance rates can rise comparatively.
On the other hand, a government concerned about a market clash might try to attract public resources by force. The government said it will allow the public to participate in more than half of shipping finance funds, but the possibility is very low. It is reviewing a way to let part of the advanced rent payments or loans of shipment companies to flow in.
(Editor's Note: A previous version of this article incorrectly translated the name of the bank in question as the Industrial Bank of Korea (IBK). The bank in question is Korea Development Bank (KDB). We apologize for the error.)