The purpose of this study is to analyze the financial systems in major developed countries in relation to the liquidating patterns on insolvent enterprises, as well as identify ways to readjust Korea’s financial system and non-performing loans befitting its economic conditions.
When banks retain non-performing loans, they increase their management risk, which could harm their security, integrity and profitability. Due to the large amount of non-performing loans (NPLs) owned by banks, Korea’s financial industry is in urgent need of readjusting their loan amounts – especially since these banks plan to open their doors to domestic and foreign instruments.
One of the factors preventing banks from effectively clearing these loans is the conflict of interest between economic units that are related to the corporations with the bad loans. Especially in the case of Korea, along with social equilibrium issues, the bank has relied much on the government, granting too many loans without adjusting their accounts. The basic formula for cleaning up their non-performing loans is for banks to take ownership of their debt, armed with information on their invested companies, and for the government to stop interfering with banking operations. The amount of bad loans will still be high, but the NPL ratio will gradually decrease, eventually allowing the banks to resolve the issue themselves. In particular, on the financial architecture side, most corporate funds were obtained through indirect financing. The bank would then be effectively performing their intended duties, becoming more effective.
There are two ways for a bank to adjust and categorize non-performing loans. One is to categorize NPLs by amount of loan, while the other is by the amount of time the loan is past due, as well as the likelihood of loan repayment in the future. Bonds, which are often considered a sunk cost, would be written off as bad debt, while for loans deemed “doubtful,” the bank may transition to corporate stocks. There are two major solutions to overcome bad debt. One involves the repayment of expenses using funds reserved for deficits, made possible by reevaluating the bank. Also, the bank can strengthen its internal reserve system to gradually redeem the loss. Another solution is to transform debt into corporate stock as a form of repayment. Debt to stock can improve the integrity and liquidity of a bank’s assets. Moreover, banks can advise corporations with debt on management issues using their own information on the companies. This method would simultaneously relieve companies of repayment pressure and strengthen their own financial structure.
Alongside adjusting existing debt, it is important to prevent an increase in debt – which could be the result of liberalization, internationalization, and securitization of the financial market in the future.
금융환경변화와 은행부실채권 정리방안(Changes in the financial environment and readjusting bank non-performing loans (NPLs))
[서울] : 한국개발연구원
|Series Title; No||정책연구시리즈 / 91-10|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|