Bad Debts
It has been analyzed that the Korea Development Bank (KDB) and the Export–Import Bank of Korea (Korea Eximbank) will need more than 2 trillion won (US$1.77 billion) of allowance for bad debts on Shipbuilding & Marine Engineering (DSME). Moreover, the possibility of bad loans on DSME is expected to be higher, according to accounting companies which conduct a due diligence on two state-run banks. Accordingly, the government is also considering new investment in kind just in case that the Korea Eximbank is hit by a massive allowance, showing a higher possibility of bad loan expansion caused by DSME.
According to the financial authorities and accounting firms on March 1, accounting companies, which conduct a due diligence on the KDB and the Korea Eximbank before the settlement at the end of March, concluded that the two state-run banks should raise provisions of more than 1 trillion won (US$884.96 million) each. The two banks have 16.1 trillion won (US$14.25 billion) of exposures on DSME, including credit, repayment guarantee (RG) and stakes in debt-equity swap. The KDB and the Korea Eximbank currently consider their exposures on DSME in No. 2 of five levels of soundness, which means that it requires attention. When the soundness is categorized into dangerous levels, the minimum allowances are 7 to 19 percent of exposures and each bank decides on actual provisions.
Currently, the KDB is putting 1.35 trillion won (US$1.19 billion), which accounts for 19 percent of 7.1 trillion won (US$6.28 billion) of exposures, aside for allowances, while the Korea Eximbank is saving 900 billion won (US$796.46 million), which is less than 10 percent of 9 trillion won (US$7.96 billion) of RG. According to the accounting firms, the two state-run banks will be hit by 2.35 trillion (US$2.08 billion) and 1.9 trillion won (US$1.68 billion) of provisions, respectively.
An official from the financial authorities said, “After the controversy over accounting fraud on DSME, accounting companies consider all the credit values of DSME losses, underestimating the corporate value. Since they believe that the two banks can face trillions of won in losses each, they are having different opinions with the banks.”