The financial authorities have decided to ease the burden on the banks. It means that the financial authorities will cut additional burden of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (DSME) while maintaining existing loan ‘blacklist degree’ and not lowering loan degree down in ‘fix’.

According to the financial sector on March 22, the financial authorities plan to apply ``credit category classification`` irregularly despite of banks do not accumulate additional allowance for loan losses when they switch to DSME.

Earlier, the Financial Services Commission has called on major banks included in the creditors`` creditor group to ``debt for equity swap`` and to acquire new funds for DSME. On the other hand, banks have expressed their dissatisfaction that the allowance for loan loss due to the debt for equity swap can be increased significantly.

The Financial authorities have decided to maintain the credit rating in the ‘blacklist’ grade, which is the existing grade in order to reduce the burden on the financial sector.

According to the NICE Credit Rating, the risk exposure of the banking sector to DSME is estimated at KRW 19.8 trillion. Government run banks such as Export and import banks along with Industrial bank account for 84.2% in charge of dual policy loans, and NH Nonghyup Bank, KB Kookmin Bank, Shinhan Bank, KEB Hana Bank and Woori Bank have the rest. Except for the double-advance payment guarantees (RG), only loans worth KRW 4 trillion for state-owned banks and KRW 580 billion for commercial banks are subject to investment.

As a result, credit rating of DSME is likely to decline from ‘blacklist’ to ‘fixed’ according to asset quality reclassification. The banknotes should accumulate additional allowance for the losses if the rating declines. In the case of the precautionary level, it will accumulate 10 ~ 15% of the allowance, but if it goes down to the fixed grade, the higher 20% should be accumulated as the provision. In other word, the state-owned banks will pay KRW 800 billion and the commercial banks will receive the additional allowance of KRW 160 billion.

A representative from the banking authority explained, ‘the government has somehow agreed on the fact that it will suffer double loss in the case of the loan is downgraded due to the credit rating downgrade.’

A senior official of the financial institute pointed out, ‘We have concluded that it is not necessary to classify the asset quality of the banknote as a substitute for investing in the banking sector, although it is a principle that debt restructuring through investment conversion should be lowered to a lower level than the current level, considering the fact that DSME’s financial situation improves through new funding.’

However, even if the burden of loan loss provision is reduced, the banking sector is still burdened by the additional support for DSME.

A senior official of a commercial bank sector said, ‘The fact that the conversion of DSME, which is in need of management normalization, is a loss. In fact, last year, the Korea Development Bank shifted its investment to KRW 1.6 trillion and all of the losses were handled.’

On the other hand, it is pointed out that there is a violation of accounting regulation. One accounting expert pointed out that ‘provision is a part of the financial statement that should be reflected in the financial statements in accordance with the international accounting standards while the banks are investing. If the exception is recognized, it may damage the transparency of accounting.’

By Kang Eun Seong esther@


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