The Export-Import Bank of Korea (Korea Eximbank), whose non-performing loans (NPLs) have skyrocketed during the course of the ongoing restructuring of South Korean shipbuilders, is mulling over a big bath. As of the end of March this year, the bank had a coverage ratio of 78% with respect to substandard, doubtful and loss loans, much lower than the average of commercial banks of 145.3%.
Many Korea Eximbank employees have advocated a big bath for financial health since president Lee Duk-hoon took office in March 2014. The bank adopted aggressive lending policy back in 2010 and this caused its lending to increase from 36.9427 trillion won to 84.2857 trillion won between 2006 and 2012 and then to 90.8941 trillion won and 106.2335 trillion won in 2013 and 2014, respectively. The ratio of the three types of loans soared from 0.66% to 3.24% between 2012 and last year as well.
The bank hesitated about a big bath for three years and the restructuring of South Korean shipbuilders started this year to trigger an exponential increase in NPLs. Specifically, the bank has an exposure of 1.2245 trillion won in STX Offshore & Shipbuilding and 9.2711 trillion won in Daewoo Shipbuilding & Marine Engineering. With STX Offshore & Shipbuilding in court receivership since last month, the Korea Eximbank to add approximately one trillion won to its allowances. The loans provided for Daewoo Shipbuilding & Marine Engineering are classified as normal as of now, but the allowances increase by no less than about 650 billion won once the classification changes to precautionary. Besides, the exposures amount to 5.7738 trillion and 4.3289 trillion won with regard to Hyundai Heavy Industries and Samsung Heavy Industries, respectively.
Under the circumstances, the Korea Eximbank agrees to the necessity of a big bath. Still, there are some obstacles ahead of it. If the bank opts for it, the bank has to go into the red. This is not welcome news for the bank, which has remained in the black all the way since it was established in 1976. In addition, the red ink in this case could result in trade disputes. According to the OECD Arrangement on Officially Supported Export Credits, the red ink of any government agency that is caused by domestic industrial support is regarded as distortion of international trade order. Furthermore, with the president’s term of office scheduled to expire soon in March next year, the big bath could lead to his poor track record.