The Korea Herald


Banks face heavy sanctions for irregular lending

By Kim Yon-se

Published : March 8, 2012 - 19:15

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FSS chief says it is time for households to cut spending

The nation’s top financial regulator has vowed stern punitive action against banks engaged in irregular lending practices.

Since he took office as chief of the Financial Supervisory Service on March 27, 2011, Gov. Kwon Hyouk-se has taken the initiative in conducting intensive inquiries into major banks for alleged business irregularities.

The regulator’s full-fledged probe has been focused on the allegation that banks urged many individual and corporate customers to purchase insurance products or investment funds in exchange for issuing loans.

Gov. Kwon reiterated the “new legal grounds to crack down on the practices and issue sanctions on rule-violators” during a recent interview with The Korea Herald in his office in Yeouido, Seoul.

If a bank is negligent in enhancing financial soundness, the bank can expect regulators’ flexibility as long as the situation does not harm consumers, he said.
Financial Supervisory Service Gov. Kwon Hyouk-se (fourth from left) poses during an educational event, dubbed “Campus Finance Talk,” at Chonnam National University in Gwangju. (FSS) Financial Supervisory Service Gov. Kwon Hyouk-se (fourth from left) poses during an educational event, dubbed “Campus Finance Talk,” at Chonnam National University in Gwangju. (FSS)

“But their irregular loan issuances produce victims. We cannot tolerate the practices in terms of protection of financial consumers,” he said.

Due to the irregular lending, many borrowers saw losses from investing in high-risk funds or now suffer from the burden of paying unnecessary insurance premiums, according to supervisory officials.

“It seems that financial companies ― both Korean and foreign ones operating here ― have enjoyed easy sales (thanks to improper lending),” he said.

“But the lenders that keep on doing so-called easy business with little cost will have to pay huge cost including a variety of sanctions,” he said.

Apart from levying fines on rule-violating banks, the FSS, in collaboration with investigative agencies, plans to seek imprisonment for bank employees who urged customers to buy other financial products in exchange for issuing loans.

Formerly, those engaged in the practice had been subject to fines at a maximum of 50 million won ($44,000).

But under revised laws, those involved could face fines of up to 100 million won or criminal punishment ― imprisonment for up to three years.

An FSS task force conducted inquiries on eight banks between July and September in 2011 and the regulator carried out periodical probes on two commercial banks.

The 10 banks were Woori, Shinhan, Hana, Busan, Jeju, Citibank Korea, Standard Chartered Bank Korea, Industrial Bank of Korea, NH Bank and the National Federation of Fisheries Cooperatives.

It is uncertain whether the law revisions will be retrospective.

Concerning snowballing household debt, Kwon said “individuals should tighten their belts” to resolve the problem.

“There is a policy limit in resolving the household debt,” he said. “Now it’s time for each household to reduce spending in three sectors ― housing, education and telecommunications.”

He described the situation of more borrowers resorting to private lenders in the wake of regulators’ tighter control of commercial banks’ lending as a “dilemma.”

To prevent a great number of consumers from being crushed by high interest rates charged by private lenders and the secondary banks, the FSS plans to widen the scope of government-led micro loans with lower rates for the underprivileged, he said.

The top regulator went on to say that restructuring of the debt-saddled savings banking industry will still be the primary policy-direction for the FSS this year.

“I would liken inducing a soft landing of savings banks to solving a higher-degree equation,” he said.

But Kwon did not confirm the speculation that several more troubled players will be subject to business suspensions in one or two months.

The FSS will determine its future measures on a group of savings banks after reviewing their yearly financial statements that usually are calculated in February or March, he added.

Regarding the macro economy, Kwon said regulatory officials usually set guidelines for financial companies, bearing the worst scenario in mind.

“As we cope with the worst scenario, I believe foreign rating agencies assess them (Korea’s regulatory policies) positively,” he said.

Born in 1956 in Daegu, he graduated from Seoul National University and passed the Public Administration Examination in 1980.

He formerly worked as vice chairman of the Financial Services Commission, the decision-making panel of the FSS, and a director general of the Finance Ministry.

By Kim Yon-se and Cynthia J. Kim
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