Tuesday, October 15, 2019
Korean Gov’t Asking Banks to Give Out More Loans to Auto Component Producers
Despite Growing Default Rates
Korean Gov’t Asking Banks to Give Out More Loans to Auto Component Producers
  • By Yoon Young-sil
  • March 26, 2019, 09:46
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The South Korean government is pressuring banks to expand financial support for auto component producers which are in financial difficulties.

The South Korean government is asking banks to expand financial support for auto component producers which are in financial difficulties. However, the more banks give out loans, the higher the default rate goes up.

Major commercial bank loans for auto parts manufacturers showed an overall decline last year. Some banks had better loan performance than before but the loan default rate increased. On the other hand, the default rate of banks which had a lower balance for related loans decreased. Accordingly, banks cannot blindly give out more loans to companies as the government requested.

The loan balance for auto component companies provided by four banks, including Kookmin, Hana, Woori and Nonghyup Bank, except for Shinhan Bank which did not sum up data, came to 10.24 trillion won (US$9.03 billion) in the fourth quarter of last year, according to financial industry sources on March 25. The figure went down by 2.05 percent, or 214.40 billion won (US$189.07 million), from 10.45 trillion won (US$9.22 billion) in the first quarter of last year. The default rate also rose at the same time. The average default rate in the relevant industry increased from 0.55 percent in the first quarter of last year to 0.6 percent in the fourth quarter.

The government is asking banks not to withdraw loans from car parts producers. “Recently, banks have a pessimistic outlook for the auto component industry and they are reluctant to extend debt maturities and give out new loans. Please do not unwind loans without considering the financial and business conditions of individual auto component companies,” said Choi Jong-ku, chairman of the Financial Services Commission (FSC), in October last year.

However, banks put auto-related industries under scrutiny earlier this year in order to manage their soundness. Once an industry is put under scrutiny, banks manage loans more strictly and it will be difficult for companies in this sector to borrow money from banks. Accordingly, banks cannot but give out loans to the related companies under stricter loan regulations this year.

An official from the financial industry said, “When banks designate an industry for stricter administration and manage the amount of its loans, they cannot increase loans for the sector because they apply stricter screening standards. This is why the government has come up with plans to provide funds in the form of primary collateralized bond obligation (P-CBO) but it can be just a stopgap when the market conditions cannot recover.”