EDITORIAL from the Korea Herald on Feb. 2)

Credit checks again

Banks are starting a second round of credit risk assessments of their corporate
clients as a prelude to what they say will be sweeping restructuring. But their
promise is less than convincing, given their abysmal track record.

The outcome of their latest credit assessments was simply disappointing. Of the
112 construction and shipbuilding companies whose books the lenders had
scrutinized, 14 were put on debt workout programs and another three had their
credit lines withdrawn. That was far short of the expectation that about 30
percent of the companies under review would be either subject to restructuring or
denied credit.
The second round of credit assessments involves an additional 98 construction and
shipbuilding companies and 44 business groups. In addition, the banks will
determine whether or not to downgrade the creditworthiness of the corporations
that have already been placed in the B category - those experiencing only a
temporary credit crunch - after reexamining their books. They will also decide
which companies in the C category - those subjected to restructuring - will be
selected for a debt workout.
The lenders are making these reassessments are under pressure from the
government. They complain the government is incessantly attempting to interfere
in their asset management behind the scenes, while promising autonomy to the
banks in public. There is no telling when the reevaluations will be completed.
Nor is there predicting how many in the B category will be downgraded and listed
for restructuring and how many in the C category will be placed in workout
programs.
But the banks will have to speed up the processes. Foot dragging will be of no
help to either the banks or their clients. A case involving a homebuilder
explains why. When selected for a workout, it boycotted the time-consuming
process and applied for court receivership.
True, it is not easy for banks to downgrade their corporate loans because an
increase in nonperforming assets will damage their standing. If bad loans
increase in the wake of credit risk evaluations, the banks will need new capital
injections so that they will meet the capital adequacy requirements set by the
Bank for International Settlements.
Restructuring conducted under the supervision of banks will be painful to
corporations. What they will have to do is sell off non-core assets and even some
of the core assets, if necessary, renegotiate labor contracts as part of the
efforts to cut overhead and reorganize business operations. But restructuring is
not a choice but a must for corporations in serious trouble, given the worsening
business environment. Corporate revenues are nose-diving now as consumers are
wary and exports are plummeting.
Moreover, there are no signs of an early recovery. Instead, the Bank of Korea is
painting a grim picture. For the first time last week, its governor referred to a
possibility of the domestic economy contracting this year. The governor said that
the fall in gross domestic product in the final quarter of last year was not
temporary and that it would continue into the first and second quarters of this
year. He added that he was certain that this year's GDP would shrink.
Against this backdrop, the government will have to keep pressuring banks to
separate ailing businesses from healthy ones and decide which of them are
eligible for rehabilitation. They will also have to take the plunge, withdraw
credit lines from all the nonviable ones and let them collapse.
It is such bold and preemptive action that will eventually make it possible for
banks to keep their nonperforming assets under control. During these times of
economic hardship, the banks cannot afford to provide credit for corporations
whose viability is seriously in doubt.
(END)