Eight major commercial banks will next month purchase toxic loans totaling 1 trillion won ($923.6 million) issued to the construction sector as part of a bid from the nation’s financial regulators to minimize the negative impact of such loans on the market.

Financial companies have issued loans to builders in the name of “project financing” over the past few years. But in the wake of the 2008 global financial crisis, few builders have paid off their debts.

The market estimated the combined amount of soured PF loans to be worth about 6.4 trillion won. The latest plan from the banking sector to acquire the 1 trillion won worth of loans will mark the first step toward resolving the problem of souring debt, industry watchers said.

Their project will be carried out via the coming entity of a bad bank, which will be exclusively tasked with picking up property project financing loans gone bad currently held by local banks.

The UAMCO Ltd., an insolvent asset buyer launched in 2009 by local banks, is also set to participate in the establishment of the bad bank.

The new debt clearer, to be structured as a private equity fund, may pick up the 1 trillion won worth of soured PF assets at a 50 percent discount, according to the Financial Supervisory Service.

An FSS official said the new bad bank is expected to clear most of the distressed PF loans at the banks.

“Participating banks will contribute money to the bad bank according to the size of their real estate loans, with the total amount of their contribution expected to reach up to 1 trillion won,” he said.

The FSS forecast the envisioned bank to be able to clear up to 3 trillion won of bad PF loans.

A prolonged slump in the real estate market since the global financial crisis has crippled the construction sector’s ability to redeem loans extended during a previous market boom to finance their construction projects.

Their growing loan defaults resulted in having soured assets pile up on banks’ balance sheets, thereby threatening the banking sector’s fiscal stability.

By Kim Yon-se (kys@heraldcorp.com)