The proposed establishment of a bad bank is set in motion by the financial regulators, who are worried that soured project financing loans, if not dealt with appropriately, could cause a financial crisis. At the request from the regulators, creditor banks will sooner or later discuss the details, including how much of money each of them will chip in to set up a bad bank and how much of toxic loans the bad bank will purchase.
The sense of crisis has developed, with the creditor banks refusing to roll over many of the project financing loans because a growing number of the debtors are exposed to the risk of bankruptcy. Of the outstanding project financing loans totaling 66 trillion won, those maturing in the second quarter of this year stand at 14 trillion won. The financial regulators demand the creditor banks take action before it is too late.
On one hand, some of the creditor banks are grumbling, asking why they should hold the bag when their loans are secured by collateral. On the other, the debtors are denouncing the banks for refusing to roll over the loans, claiming that what they are doing is little different from lending an umbrella on a sunny day and taking it away on a rainy day.
But the ultimate responsibility lies with the financial regulators, who, in their supervision, should have prodded the restructuring of the construction industry before it was exposed to the threat of chain bankruptcies. They have failed once again to learn from past experiences.
Bad project financing loans were estimated at 9.7 trillion won at year-end. But the amount may snowball as the creditor banks are separating bad apples from good ones. If so, they will be called on to shun piecemeal measures and take a bold action that would prompt a massive restructuring in the construction industry.