The financial regulator has called on banks to keep a closer watch on debtor companies' finances to avoid a sudden default, warning that otherwise they may face regulatory sanctions, watchdog officials said Wednesday.
The Financial Supervisory Service (FSS) asked bank executives at a recent meeting to step up monitoring on financial soundness of their debtor companies when they extend loans, FSS officials familiar with the matter said.
The FSS had so far concentrated on banks' management transparency and overall financial health when they go and conduct regular inspections. But the watchdog is now pledging to put more focus on checking whether banks have thoroughly assessed debtor companies' repayment abilities before offering them any form of credit.
The regulator's move came as the responsibilities of creditor banks and regulatory authorities have been under scrutiny after a number of big-name conglomerates in South Korea failed in a row due to cash shortages.
The latest includes the default of Tong Yang Group, the 38th-largest firm here in late September, which came only five months after the 13th-biggest STX Group was placed under a creditor-led debt workout.
The FSS apparently stressed that banks could face disciplinary measures or a reprimand by the regulator if they turn out to have overlooked potential risks in their debtor firms.
Banks have already had to set aside additional loan-loss reserves worth a total of 5.4 trillion won (US$5.1 billion) in the first half of this year due to the consecutive bankruptcies of large enterprises.
Banks with the majority of their credit exposure coming from corporate loans include Woori Bank, Korea Development Bank, Hana Bank, Shinhan Bank and Korea Exchange Bank.
Every year the FSS rolls out a corporate watch list of a fe dozen highly indebted large companies and lets creditor banks take necessary measures such as signing financial improvement plans with a debtor company, depending on the state of liabilities.
The regulator picked 30 large companies for 2013 in April, including Hyundai Motor Group, Samsung Group and SK Group.