A bad bank, which is about to emerge under financial regulators’ move to write off overdue assets, is expected to absorb as much as 4 trillion won ($3.6 billion) in overdue loans held by financial companies.

While regulators are considering setting up the bad bank before the third quarter, sources predicted Tuesday that it could initially purchase around 4 trillion won in soured project finance loans extended by commercial bank syndications.

The Financial Supervisory Service said Monday that it is considering setting up the bad bank in collaboration with eight local financial groups and banks to remove non-performing property loans from banks’ balance sheets.

The banking sector has 6.4 trillion won in bad property loans.

Participating banks will contribute money to the bad bank according to the size of their dud real estate loans, with the total contribution expected to reach up to 1 trillion won, they said.

The suggestion for a bad bank came after several mid-sized builders, including Sambu Construction, filed for court receivership as they were unable to repay loans.

A prolonged slump in the real estate market since the global financial crisis has crippled builders’ ability to repay loans extended during a previous market boom to finance their construction projects.

Market observers say some commercial banks are unhappy with the bad bank plan, arguing that the move will likely pass the burden only onto the commercial banking sector.

A local banker said it will be problematic if the bad bank goes further to buy mutual savings banks’ property loans, in addition to those by the bank sector itself.

FSS data show that savings banks are suffering most from bad property loans with their average default rate reaching 25 percent at the end of 2010, far higher than the 12.9 percent average for the entire financial sector.


By Kim Yon-se (kys@heraldcorp.com)