Major commercial lenders in Korea are tightening standards on new loans for large conglomerates over fears of rising bad loans amid the ongoing corporate restructuring of ailing industries.

Outstanding loans extended by Shinhan Bank, Kookmin Bank and three other major lenders to big companies reached 90.8 trillion won ($78 billion) as of end-April, down 4.8 trillion won from 95.6 trillion won a year earlier, according to industry data. 

“Offering new loans to large companies is unlikely as we plan to reduce such lending as much as possible,” NH Financial Group chairman Kim Yong-hwan said at a press conference Tuesday.

The data and recent remarks from chiefs of Korean banks indicate concerns over the increase in loan-loss provisions as the government pushes for restructuring of the embattled shipbuilders and shippers hit by mounting losses and an industrywide slump.

NH Bank, which was hit by 300 billion won of loan-loss provision during the first quarter, cut its lending to big firms by 550 billion won to 13.1 trillion won as of end-April from a year earlier.

“We have recently conducted a sweeping review of the loan quality and sorted out loans that run the risk of turning sour in the next two years,” Kim said.

Cho Yong-byoung, CEO of Shinhan Bank, said that the banks will set aside more funds for loans that may turn sour.

“We need to reserve more fund as the ongoing industrial restructuring could have an impact on (local commercial banks’) asset quality,” Cho said in a press conference held in Germany on the sidelines of the 49th Asian Development Bank annual meeting Wednesday.

Other banks also reported tighter lending standards for industrial loans. In a bid to minimize risks from corporate restructuring and to seek out better returns, KEB Hana Bank reduced such loans by 4.2 trillion won between September last year and end-April while urging lower-rated companies repay their debt.

Market insiders point out that the tighter loan standards could take toll on other firms like those in the construction sector where there is a strong demand for such lending to finance new projects.

“Some builders are raising funds by paying higher interest than before as lenders are making far fewer loans,” an official at a construction firm said.

Regarding concerns over a possible credit crunch due to debt issues, Bank of Korea Gov. Lee Ju-yeol said last month that he would “mobilize a wide range of measures to stabilize financial markets.”

By Park Han-na (hnpark@heraldcorp.com)