Signs of Insolvency Growing among Parts Producers
The exposure of South Korea’s four major banks to the auto industry is approaching 40 trillion won (US$35.03 billion). If Hyundai Motor and Kia Motors continue to show a poor performance, their partner companies will be driven into financial trouble. Then banks are highly likely to have an increasing number of non-performing loans. Banks have practically stopped giving out new loans. They are extending the maturity of existing loans and reviewing new loans more thoroughly.
According to investment banking (IB) industry sources on October 29, the exposure of the nation’s four major banks – KB Kookmin Bank, Shinhan Bank, Woori Bank and KEB Hana Bank – to the car industry comes to 40 trillion won (US$35.03 billion). According to lending statistics collected by the Bank of Korea, the amount of bank loans to the car and trailer industry stood at 31.2 trillion won (US$27.32 billion) as of the second quarter of the year. The figure doesn’t accurately reflect the actual amount of loans as information technology (IT) and multi-industry companies were omitted.
Some watchers say domestic banks’ loans related to the car industry can far surpass 50 trillion won (US$43.78 billion) when loans from NH Nonghyup Bank and IBK Industrial Bank of Korea are included. These two banks have a considerable amount of loans to automakers’ partner firms.
A president of a commercial bank said, “As the auto industry continues to be sluggish, primary and secondary vendors manage to hang in there but tertiary and fourth-tier vendors are running out of operating funds. In fact, subcontractors which were denied loans by banks rely on special loans from the Korea Credit Guarantee Fund (KODIT) and Korea Development Bank (KDB).
Some point out that the government’s plan to provide 1 trillion won (US$875.66 million) worth of preferential guarantees through KODIT and Korea Technology Finance Corporation next month is not enough in consideration of tertiary and fourth-tier vendors. An official in charge of handling loans at a commercial bank said, “The loan default rate hasn’t increased rapidly yet, but signs of insolvency are growing, including the downgrading of loans from ‘normal’ to ‘attention required’ in loan soundness classification. We have no choice but to extend the maturity of loans first and selectively give out new loans depending on the ability to generate cash and repay.
Meanwhile, 18 out of 70 listed car component companies reported a loss in the first half of this year, according to a recent survey. For this reason, the Korea Auto Industries Cooperative Association (KAICA) asked the government for 3 trillion won (US$2.63 billion) of emergency funding.