The Financial Supervisory Service recently conducted an on-the-spot probe into Shinhan Bank and Industrial Bank of Korea over their allegedly irregular lending practices.

The regulatory body looked into their loan-related documents by dispatching a group of inspectors to the headquarters of the two banks in Seoul in late July, FSS officials said Wednesday.

“Inspectors conducted the inquiry into the allegations for about two weeks last month,” an official said. “The (ongoing) probe has been focused on unsound lending practices.”

He said the FSS could possibly issue “warning” and “caution” sanctions against Shinhan and the state-owned IBK if irregularities are uncovered in its following review of the inquiry results.

Bank executives or employees may also be subject to punitive action from regulators.

The on-the-spot inspection is drawing interest as the two banks had not originally been included in the list of yearly investigation targets of the financial watchdog.

According to consumers’ complaints filed with the FSS, IBK has been suspected of forcing a number of small- and mid-sized enterprises to buy its financial products in exchange for issuing business loans.

The bank has also been suspected of urging smaller business owners with low credit standing to buy time deposits in return for issuing credit cards, sources said.

Shinhan Bank also has been implicated in allegedly improper practices of linking bank credit to purchases of other financial products.

Sources said a number of individual customers of the commercial bank were urged to purchase insurance products or to apply for credit cards.

THe regulator is poised to widen the scope of its inquiry into the practices in the banking industry.

According to sources, Hana Bank has been under lending-related supervisory probe and Woori Bank will likely face similar one as early as September.

Market observers predict the sanctions against rule-violators will be tougher compared to past cases.

FSS Governor Kwon Hyouk-se has expressed his willingness to take stern disciplinary measures against the practices of several lenders.

He has instructed the FSS staff to bolster efforts to protect consumer rights by strengthening crackdown on irregular loan issuances.

Meanwhile, until now legal loopholes have made it difficult for regulators to efficiently reprimand banks for their improprieties involving loans.

The National Assembly has been reviewing a revised bill on enhance regulations, which has already been approved by the Legislation and Judiciary Committee.

The bill would clearly ban the practice and dictate that violators are penalized.

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