Korean lower-tier lenders reducing loans amid liquidity and property woes

[Captured from Leadcorp]

The twin slump in South Korea’s debt and property market has spilled over to lower-tier lenders, sending them to suspend new loans amid lack of funds and raising alarm over the rapid spread of liquidity woes.

According to sources in the financial industry, Leadcorp, the second largest among licensed lender in the third-tier category, on Monday has sent out messages to some corporate clients that it was accepting new loan application only until this month.

An unnamed official from Leadcorp said it was rolling back loans but denied it was completely suspending them.

The private lender has been minimizing new loans as part of “preemptive risk management,” the official said, adding that the practice has already been common with first- and second-tier lenders.

Leadcorp is the second-largest registered private lender in Korea with over 1 trillion won ($700.7 million) in assets. There are about 7,000 outside lenders offering loans that had been denied by bigger banks at higher rates.

NRcapital, also a private lender fully owned by Leadcorp, has also suspended new loans.

Suhyup Bank has virtually halted loans related to property and construction since early this month by enhancing credit line management.

Savings banks and mutual finance companies are the same.

Sangsangin Savings Bank won’t be accepting applications for mortgage loans until the end of this year. According to Korea Federation of Savings Banks, 24 savings banks have doled out mortgage loans to households in September, compared with 30 in August.’

Outside lenders have given up lending as the Bank of Korea is expected to push up the base rate of 3 percent further in November.

“Many of them have dismissed workers and are scaling down,” said an unnamed industry official. “Money is not in circulation in the private lending sector and many entities struggle to stay afloat.”

The credit card crisis in 2004 that led to a rise in delinquent borrowers and sluggish economy had led private lender Rush & Cash to suspend new loans for more than three months. Private lenders have cut back but fell short of full suspension of new loans in the wake of 2009 global financial crisis.

“It is the first time to the industry is halting new loans since 2004,” said an unnamed official from the private lending sector. “The situation looks graver than the wake of 2008 global financial crisis.”

The default of Legoland project financing has thrown cold waters on private lenders. Leadcorp that reduced new loans has secured funds via corporate bonds. A rise in corporate bond yield however has made it difficult for the private lender to raise new funds.

According to Korea Financial Investment Association, the yield on three-year AA- unsecured corporate bond stood at 5.682 percent as of Tuesday morning, more than doubled from the beginning of the year. Three-year BBB- unsecured corporate bonds yield reached mid-11 percent.

Private lenders have also been affected by a decline in property prices as it has become more difficult to review collateral due to unstable prices.

According to industry sources, Leadcorp gave out mortgage loans up to 90 percent of the market value of housing until the beginning of the year. It won’t be able to recoup the loans when housing prices fall beyond 5 percent.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]