South Korea's financial watchdog said Wednesday that it has picked 175 small and medium enterprises to be placed under debt restructuring this year as part of government-led efforts to sort out highly indebted firms and prevent their sudden collapse.

The number of debt-heavy firms selected for 2015 rose by 50 to 175 this year from a year earlier, with 70 of them given a rating of "C" and the remaining 105 graded a "D," according to the Financial Supervisory Service.

The C-rated companies are subject to a debt workout program led by their creditor banks, while those given a D have no potential to stay afloat.

As part of its regular corporate oversight, the FSS releases the watch list of highly indebted companies once a year based on a survey on 17,594 SMEs conducted by local creditor banks between June and October.

The FSS said that the sharp on-year gain is attributable to a protracted slump in demand at home and abroad, while it has implemented stricter criteria for the credit risk assessment.

The manufacturing industry was hit hardest as the number of listed manufacturers soared to 105 from 76 over the cited period.

Electronics and machinery companies saw their figures rise to 19 and 14, respectively, this year, up from 14 and nine.

The watchdog said local banks and other financial institutions have extended a combined 2.2 trillion won ($1.9 billion) worth of loans to the 175 troubled firms.

The lenders need to set aside an additional 450.4 billion won against potential defaults, it added.

The FSS noted that it is unlikely for such risks to have a remarkable impact on the banks' balance sheet as the additional bad loan expenses are expected to drag down their capital adequacy ratio by 0.03 percentage point to 14.06 percent from 14.09 percent tallied in June.

The Seoul government has called for harsh corporate restructuring, pushing local banks and financial institutions to eliminate highly indebted and unprofitable companies from the market amid lingering economic uncertainties at home and abroad.

South Korean banks have been struggling from mounting bad loans extended especially to the shipbuilding sector, which posted unprecedented massive losses this year stemming from a worldwide slump in the industry.

Daewoo Shipbuilding & Marine Engineering Co., the country's No. 3 shipyard, suffered a third quarterly deficit of more than 3 trillion won, ringing the alarm for financial authorities and the entire business circle. (Yonhap)