[THE INVESTOR] Korea Development Bank, the government-owned bank in the vanguard of the country’s corporate restructuring drive, is finding itself in a crisis of its own.

KDB suffered a severe blow to its credibility and integrity Wednesday, when the state audit agency said KDB was partly to blame for problems at Daewoo Shipbuilding and Marine Engineering, including the alleged 1.5 trillion won ($1.28 billion) accounting fraud. As the firm's main shareholder and creditor, KDB had “neglected” its duty to oversee the shipbuilder’s finances, the Board of Audit and Inspection said.

“It is deplorable that KDB, with all those flaws of its own making, is and will continue to be wielding the axe in the corporate overhaul drive,” said Rep. Kim Sung-sik of the minority People’s Party.

The crisis of confidence has struck the bank as Korea prepares to set up an 11 trillion won fund to give KDB and another policy bank Export Import Bank of Korea enough ammunition for the looming wave of debt restructuring.

KDB holds the key to the fate of many large companies with debt problems, including Hanjin Shipping, Hyundai Merchant Marine and Samsung Heavy Industries. It is the main creditor of these three and a score of others in the crisis-hit shipping and shipbuilding industries.

Daewoo Shipbuilding, originally part of the now-defunct Daewoo Group, became a subsidiary of KDB in 2000, as a result of a near 2 trillion won state bailout following the group’s demise during the Asian financial crisis in the late 1990s. KDB has a total of 132 nonfinancial subsidiaries from past bailouts or equity investments.

In its report, the state audit body BAI said that Daewoo Shipbuilding cooked its books to hide losses in 2013 and 2014, which allowed it to post net profits of 323.7 billion won for the period. In reality, the company had built up a net loss of 839.3 billion won. 

KDB did not analyze the shipbuilder’s finances after February 2013, despite having set up a system for detecting irregularities in the books, it said.

Moreover, the bank, along with the Export-Import Bank of Korea, injected fresh funds of 4.2 trillion won into the shipbuilder when it reported a record loss in 2015.

Public prosecutors are currently investigating DSME for the alleged accounting scam and embezzlement. Observers say they may expand the probe to see if the KDB officials responsible for oversight of the firm should be held legally accountable.

Hong Kyttack, who ran the bank for three years till February this year, claimed in an interview with a local daily last week that key decisions, particularly those concerning bailouts of large companies like DSME, came from high above him, hinting that presidential aides and top government officials were the real decision-makers.

Amid mounting criticism and calls for reform of KDB, however, observers and government officials say Korea has a fire to put out and KDB is the only firefighter with the proven ability to do it.

“Right now, KDB is regarded as the main culprit for (the DSME problems), but we have no replacement for it,” Yim Jong-yong, the head of the Financial Services Commission said Thursday.

KDB, in response to the audit report, said it would strengthen monitoring of the accounting and financial stability of subsidiaries. It plans to initiate the sale of 92 subsidiaries this year.

By Lee Sun-young (milaya@heraldcorp.com)