South Korea plans to permit healthy savings banks to engage in consumer finance in a bid to help them secure stable sources of income, the financial watchdog said Wednesday.

The Financial Services Commission (FSC) said consumer finance loans will be allowed for savings banks with more than 10 percent capital adequacy ratio and less than 8 percent sub-standard loan ratio.

Consumer finance refers to the provision of loans to consumers who want to finance the purchase of big-ticket items such as autos, electronics and homes.

The move came as local savings banks have been suffering from a pile-up in bad debt stemming from sour property loans, which has forced the FSC to suspend operations of eight players since January.

Savings banks competitively extended such loans to small builders, riding a housing boom in 2005-06. But the global financial turmoil and a tepid housing market have turned those loans sour, compromising the health of local savings banks.

"Recent problems of savings banks came as they excessively focused on extending real estate loans because their role of offering loans were taken by consumer finance companies or private money lenders," Koh Seung-beom, director-general at the FSC's financial services bureau, said in a press briefing.

"The move aims to help savings banks beef up their competitiveness by leading them to serve as financial firms catering to low-income borrowers," Koh said.

The FSC said 28 savings banks currently meet the financial conditions for engaging in consumer finance. Even though they could offer consumer finance, more than half of such loans should be provided to individual customers or smaller firms in the areas where the savings banks are located.

In an effort to overhaul the ailing sector, the FSC launched on July 4 a two-month inspection into 85 savings banks to look into their financial health and determine whether to pump public funds into viable players.

The regulator has requested all players submit self-rescue measures like asset sales or injections of funds by their largest shareholders.

In the second half, the FSC plans to restructure the troubled industry based on the outcome of the inspection. The government said earlier it would pump public funds into viable savings banks to help their survival, but it may weed out non-viable players in a bid to prevent their potential defaults from weighing on the financial system. (Yonhap News)