This study surveys the current status of distressed debts at banks in Korea, and explores possible policy solutions that are applicable to the Korean situation. As providers of economic and financial services that are indispensible to the national economy—intermediation of financial investments and settlements—banks are not only profit-pursuing corporations but also special entities with a semi-public nature. They can therefore claim special government measures for the stability of the credit order. The banking industry today in Korea, however, is burdened by a significant amount of bad debts, which seriously compromise the stability of the industry’s profit-making structure.
As of the end of June 1990, the total amount of distressed debts at general banks in Korea amounted to KRW 2.1567 trillion, KRW 1.1582 trillion of which constitute uncollectible loans. The remainder of loans that are collectible, but at significant losses, amounts to KRW 998.5 billion. Banks accumulated a bewildering amount of bad debts because they were forced to take up the financial liabilities of dozens of insolvent businesses in marine transportation, overseas construction and engineering, textile and lumber industries that the government decided to restructure in the 1980s. One main reason for taking stock of, settling and eliminating bad debts in a given economy is to resolve the acute conflicts of interests that arise among parties holding significant stakes in the insolvent businesses and the distribution of losses and risks thereof. Moreover, the banks’ customary and habitual dependency on the government to take care of its loans and related affairs, under the current regime of bureaucratic finance, has caused the banks to be rather passive in the matters of loan follow-up, which has culminated into today’s bad debt crisis.
Therefore, the underlying basis of the policy on settling the distressed debts of banks should involve minimizing the government’s intervention and letting banks apply the knowledge and information they have of debtor businesses to solving the problem. This bank-led approach to problem-solving is relatively feasible because the absolute amount of accumulated distressed debts, although still sizable, has been in gradual decline. As similar cases abroad demonstrate, there is still ample room in the Korean economy to allow banks to solve the situation on their own because much of the capital that businesses and industries have enjoyed until now has been procured in the form of indirect financing.
은행부실채권 정리방안에 대한 고찰(Solutions to the distressed debts of banks)
|Journal Title; Vol./Issue||한국개발연구:Vol. 13(Issue 1)|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|