FSS intensifies probe into real estate financing as credit risks loom

Korea’s financial watchdog is strengthening its probe into companies connected to real estate project financing (PF) loans to address credit risks.

Financial Supervisory Service Gov. Lee Bok-hyun speaks in a meeting in central Seoul on Jan. 25. [NEWS1]

Korea’s financial watchdog is strengthening its probe into companies connected to real estate project financing (PF) loans to address credit risks.

Financial Supervisory Service (FSS) told executives of savings banks and capital firms to conservatively raise provisions to absorb potential losses that may incur from the PF loans if their projects fail. They were told to categorize short-term bridge loans that cannot be converted into PF loans as a loss and raise the provision of the amount accordingly.

The FSS admitted Monday that they gave the orders in a meeting with the executives held last week.

The financial watchdog plans to bring up a specific guideline on how financial companies should handle PF loans, including which projects should be considered insolvent and the amount of provision they should raise. The FSS has not yet specified the date on when it will be introduced.

As concerns surrounding the PF loans continue, the regulators will also look into the accounting methods of builders and shipbuilders to prevent any form of accounting fraud. The financial watchdog aims to discover any overstatement of the companies’ revenue or omission of their debts.

The FSS has said financial firms should swiftly sell insolvent real estate projects to address the credit risks.

The FSS Gov. Lee Bok-hyun told financial firms to “quickly and boldly sell” unprofitable real estate projects based on risk analysis in a meeting with regulators and heads of brokerage companies last week. Lee warned brokerage companies and their executives will be held responsible if their failure to manage risks develops into a factor that disturbs the market.

The delinquency rate for PF loans for the entire financial sector rose to 2.42 percent last September from 1.19 percent at the end of 2022. The delinquency rate for PF loans at savings banks jumped to 5.56 percent from 2.05 percent over the same period.

The number of PF projects that have been put out for auction totaled 120 as of last September. That accounts for some 4 percent of the total PF projects.

BY JIN MIN-JI [jin.minji@joongang.co.kr]