(2nd LD) S. Korea to pump 12 tln won into banks in March

(ATTN: TRIMS throughout; CLARIFIES paras 3,11; ADDS analyst's remarks in para 12)
SEOUL, Feb. 25 (Yonhap) -- South Korea's financial watchdog said Wednesday the
government will inject an initial 12 trillion won (US$7.98 billion) into local
banks this March to bolster their capital base and encourage risk-averse lenders
to expand loans.
The move comes as banks have become increasingly reluctant to lend, especially to
smaller, cash-strapped firms, due to fears that a deepening economic slump may
result in more bad loans, compromising their financial soundness.
The Financial Services Commission (FSC) said the money will come from a 20
trillion won bank-recapitalization fund to be used to buy subordinated bonds and
hybrid debt from lenders. The watchdog plans to receive applications from banks
by the end of this month.
The amount of each capital injection will be determined by the size of the bank's
assets, and will be adjusted according to changes in its capital adequacy ratio
and track record of lending to smaller firms, the watchdog said.
"The fund will set sail in a bid to prompt banks to give support to the real
economy and accelerate the corporate restructuring drive," Kim Kwang-soo,
director-general at the financial services bureau of the FSC, told a press
conference. "Management interference (by the government) will be excluded."
Since late last year, local banks have been struggling to raise their falling
capital adequacy ratios, a key barometer of financial health, as the slowing
economy and the corporate restructuring drive are increasing the amount of bad
loans.
The government has said that local banks can tap the recapitalization fund on a
voluntary basis. Still, banks are wary of using the fund due to fears it may
tarnish their credibility.
But in a recent meeting with Chin Dong-soo, chairman of the FSC, nine heads of
local banks agreed in principle to use the fund to boost lending to smaller
companies and cope with the economic downturn.
Local banks' lending to smaller firms dipped by 1.8 trillion won in December
before increasing by 3.1 trillion won in January, according to data compiled by
the watchdog.
According to the FSC, the Bank of Korea (BOK), the country's central bank, will
inject up to 10 trillion won into the proposed fund. The state-run Korea
Development Bank (KDB) will chip in 2 trillion won, while other institutional and
retail investors plan to contribute the remainder.
In a separate statement, the BOK said its monetary policy committee has decided
to contribute to the fund by extending loans to KDB, which in turn will re-lend
the money to the recapitalization fund.
"It is positive that the fund will serve as a safety net to buffer falling
capital adequacy ratios," said Shim Kyu-sun, a banking analyst at Hi Investment &
Securities Co. "But it remains to be seen whether bank lending will really
increase in a situation where risk aversion still persists,"
As of the end of last year, the average capital adequacy ratio of 18 commercial
and state banks was at 12.19 percent, up 1.33 percentage points from three months
earlier, as lenders made efforts to boost their capital base through share and
bond sales.
As of end-December, the capital adequacy ratio of nine local banks was below 12
percent, the minimum recommended by the Financial Supervisory Service. Twelve
lenders' tier one ratios, a barometer of core capital, fell short of the advised
9 percent.
sooyeon@yna.co.kr
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