Korea plans to tighten supervision of savings banks after the government was forced to suspend eight lenders this year because they were unable to meet depositors’ withdrawal demands.

The Financial Services Commission will stop setting favorable lending limits for savings banks that have a capital-adequacy ratio of more than 8 percent and a bad-loan ratio below 8 percent, the regulator said in a report to the National Assembly’s policy committee Wednesday. It also aims to put limits on high-risk assets and excessive expansion, the commission said.

Smaller banks in Korea have seen loans for construction projects turn sour amid a real estate market slump following the global financial crisis.

To secure funds to help restructure ailing savings banks, the government plans to raise the deposit insurance rate for the industry to 0.4 percent from 0.35 percent and create a restructuring account under the state-run deposit insurance fund, the FSC said.

The regulator will also tighten controls on the owners and major shareholders of savings banks to prevent abuse of funds and improve disclosure rules to protect customers, the report said.

Local savings banks have been hit hard by a pile-up in sour property-linked loans, compromising their financial health. The regulator has suspended operations of eight ailing savings banks since January, due to weak capital strength and liquidity crunches sparked by deposit withdrawal.

The FSS reported to lawmakers that the default rate on financial firms’ construction project financing loans doubled last year from a year earlier due to a slumping housing market.

The delinquency rate of such loans reached 12.84 percent as of the end of September last year, compared with 6.37 percent a year ago, the governor said.

Last year marked the first time the PF loan default posted a double-digit reading.

Domestic firms had an outstanding 71.8 trillion won ($64.5 billion) in PF lending as of end-September, down from 82.4 trillion won a year earlier, according to the FSS.

Korea’s financial regulator proposed a revised bill on Tuesday to enable the government to chip in part of aid funds designed to overhaul troubled savings banks if necessary.

As part of the government’s move to overhaul the ailing sector, the FSC had been seeking to pool about 10 trillion won ($8.94 billion) in liquidity from the broader financial sector to create aid funds in a bid to draw up ammunition for the drive.

But opposition lawmakers have been vehemently against the government’s move, claiming that the creation of aid funds is nothing but a stop-gap measure and public money should be injected to restructure the ailing sector.

As a parliamentary extra session is set to close on March 12, the FSC proposed an amendment to lawmakers that the government would also chip in part of the aid funds to be used for overhauling the troubled savings bank industry. The government is seeking to run the funds until 2025.

“The government is considering reviewing opinions from the opposition party. But this aims to supplement the government’s earlier proposal, not to withdraw it outrightly,” said an official at the FSC.

(From news reports)