South Korea’s financial authorities announced plans to minimize risks stemming from short-term real estate project financing (PF) loans Monday that include additional funds for strong, survivable projects but a speedy way out for those failing.
The authorities also set up new evaluation standards to more swiftly determine which projects will likely succeed and which should be liquidated.
“Despite past efforts, there have been cases where loans to failing projects are generously rolled over while interest rates and inflation are expected to remain high for an extended period of time, delaying the restructuring and liquidation of businesses and leading to a rise in the delinquency rate of financial institutions,” the Financial Services Commission (FSC) said in a joint press release with the Financial Supervisory Service.
“Hence, the financial authorities have been continuously developing additional steps to ensure the soft landing of real estate PF loans … while pushing to revise PF loan evaluation standa
rds to enable an “orderly soft landing of PF loans,” it added.
The revised evaluation standards provide four, instead of the existing three, classifications of real estate PF loans that will encourage financial institutions to more objectively or “strictly” determine the feasibility of real estate projects they have financed, according to the financial regulators.
“The evaluation standards currently in use do not adequately reflect the characteristics and risks of PF loans, and thus limiting the selection and orderly liquidation of businesses that have little business value,” it said.
“Hence, the government will seek to encourage financial institutions to strictly distinguish between normal business projects and projects that lack business value through objective and reasonable evaluation by improving the business evaluation standards,” it added.
The FSC said it will continue to provide adequate funding to “many” normal businesses that have enough business value.
FSC Secretary-General Kwon Dae-young said
up to 95 percent of all PF loan-funded projects may be considered “normal” businesses.
To this end, lenders will be allowed to expand their initial loans to builders that are working on projects with enough business value but are facing difficulties due to rising prices, Kwon told a press briefing.
Currently, builders and developers are required to secure additional funding themselves through bridge loans when needed, often at higher interest rates, according to Kwon.
Also to help speed up the restructuring process, builders and developers that sell their failing projects will be given priority when and if such projects become available to sell after restructuring, he added.
“It will create an environment for financial institutions to voluntarily restructure or liquidate the few projects that lack business value and provide necessary funds and incentives needed for the restructuring and liquidation of businesses,” the FSC said in its press release.
The financial regulators said they will also work to min
imize the impact on both financial institutions and construction firms while pushing to soft-land real estate PF loans.
“The PF feasibility evaluation standards to be revised are set to be implemented in June following sufficient opinion gathering and will be gradually applied to more businesses to minimize market concerns,” they said. “Also, (the government) plans to complete revising the system, including the incentive system, by June.”
Source: Yonhap News Agency