Value of Bad Project Financing Loans Reaches $1 Bln

A government study released yesterday said thrifts in Korea need to deal with bad loans worth 1.5 trillion won (one billion U.S. dollars) in real estate project financing.

Such loans are considered a major source of anxiety that could deal a blow to the Korean economy in the face of the global financial crisis.

Voluntary restructuring efforts of thrifts are likely to pick up speed as the government plans to require those involved in troubled project financing to secure additional loan-loss reserves.

After studying 899 projects relying on project financing thrifts, financial authorities said projects worth 1.5 trillion won (one billion dollars), or 12 percent of the entire project financing loans approved by thrifts, were unsound and consequently classified them "projects that could go sour."

The figures were better than the market`s own estimate that as much as 20 percent of project financing loans could go sour, but are more than 1.6 times larger than the thrifts` own calculations of bad loans amounting to 920 billion won (612 million dollars).

Such loans account for 12.2 trillion won (8.1 billion dollars), or 19 percent of 65 trillion won (43.2 billion dollars) in loans authorized by thrifts. Projects that took out the loans were categorized as "sound" (55 percent); "need caution" (33 percent); and "in danger of turning sour" (12 percent). Those classified as sound face no certain problems while those that "need caution" could encounter difficulty in acquiring approval and capital but remain sound.

One financial authority source said, "Since most of the loans taken out by projects in danger of going sour have received apartment housing or land as collateral, not all of the projects worth a combined 1.5 trillion won will see losses."

sanjuck@donga.com rews@donga.com