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Capital Markets

New Korean loan woe

Analysts are growing increasingly concerned about rising problem loans advanced to SMEs by Korean banks. The banks' track record inspires little confidence. They lent unwisely to the conglomerates in the late 1990s and then hit problems with consumer credit cards. Have the Korean banks learnt their lesson or is a third bad debt crisis looming?

THE KOREAN BANKING system should be a lot healthier than it is. Since 1998, following the regional financial crisis, the country's banks have been in constant merger mode. Twenty-seven banks have been reduced to just 11 under government pressure for them to strengthen capital adequacy ratios and improve lending practices.

Despite these efforts, though, Korea's banks have been slow to learn lessons about lending but quick to find new ways to lose money.

It's not entirely their own fault: the government is unable to stop tinkering with a sector that most developed countries have long concluded operates most effectively independently of political interference. After the chaebol lending debacle, which sprang from massive overlending by banks to Korea's family-controlled and corruption-tainted conglomerates, Korean banks entered into a government-inspired consumer lending frenzy. In 2000 and 2001, an average of 82,650 new credit cards were issued every day.

It was an ill-advised attempt to stimulate domestic demand that resulted in credit card delinquency ratios hitting almost 50% at their peak. A disaster in the making, obvious to everyone save the banks and the government themselves, it left almost 4 million Koreans credit blacklisted and effectively out of the consumer economy.

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