Korea Development Bank, the largest state-run bank in assets, is in a fix. Not only is it suffering the financial consequences of the high level of nonperforming loans caused by insolvent debtors, but it is also facing growing government pressure to improve financial soundness.

Determined to mark a rebound within his term of office, chairman Hong Ky-ttack is set on an extensive restructuring, selling off the bank’s bad loans and cutting down on the pay of senior employees, including himself.

Earlier this week, KDB’s senior employees agreed to turn in this year’s pay increase, which was 2.8 percent in average for managers and department heads and 3.8 percent for executive members.

KDB chairman Hong said he would return to the company his entire salary, which is about 191.5 million won ($166,000).

Bank officials, however, denied the speculations that these cost-cutting measures are because of insolvent debtor companies, such as Daewoo Shipbuilding & Marine Engineering.

“(The return of the pay increase) was a preemptive action to freshen up the spirit among our employees and to prepare ourselves for the persisting crisis of the banking industry,” said an official.

“It was not specifically related to the aftermath of the DSME situation.”

KDB is currently creditor and largest shareholder to the DSME, which disclosed a loss of more than 4 trillion won in the first three quarters this year.

When the massive loss was brought out in daylight, the bank also faced public criticism for failing to detect the poor management in time and for lending money without due asset evaluation.

It is also facing the burden of supplying some 4.2 trillion in liquidity to the shipbuilder by next year, jointly with Korea Eximbank.

Observers supposed that the perplexed Hong may be attempting to reform his public image, ahead of the chairmanship appointment in April next year.

Regardless of Hong’s reappointment, KDB must improve its financial soundness at all costs.

The bank’s nonperforming loan ratio by the end of the second quarter this year was 2.44 percent, which was down from 2.66 percent in the previous quarter but still the highest among domestic banks.

While KDB is struggling to sell off its bad loans, financial authorities are stepping up the supervision on the banks’ management of insolvent companies.

The Financial Supervisory Service recently sent out public letters urging banks to reinforce their forward looking criteria.

FSS Gov. Zhin Woong-seob is to meet with leading bank CEOs next week and encourage them to actively restructure marginal companies.

By Bae Hyun-jung (tellme@heraldcorp.com)