South Korea's financial watchdog said Friday that it plans to preemptively pursue corporate overhaul in a bid to prevent a potential default of ailing firms from weighing on the economy and the banking sector.

The Financial Supervisory Service (FSS) said in a report for the annual parliamentary audit that it plans to select companies for corporate restructuring by taking into account their financial health as well as potential risks.

"The FSS plans to seek for corporate overhaul in a speedy and consistent manner," the financial watchdog said in the report.

So far this year, the FSS has selected 40 larger firms for corporate overhaul as the liquidity squeeze facing several conglomerates including STX Group is weighing on the financial health of local banks.

Five affiliates of Tong Yang Group, South Korea's 38th-largest conglomerate, have applied for court receivership due to liquidity shortages after the group failed to pay back maturing short-term debts.

The FSS also said that it plans to encourage local banks to strengthen monitoring of ailing companies in a bid to help seek for speedy corporate restructuring.

The watchdog also added that it will advise credit banks to help companies under the debt-workout program normalize their operations. (Yonhap News)