Banks Will Tighten Leash on Firms

Banks are expected to beef up monitoring on the financial status of debtor companies as the Financial Supervisory Service (FSS) plans to take disciplinary action against them if they fail to do so.

“The measure is part of our efforts to set up an effective monitoring system for financially troubled companies,” an FSS official said. “It is to give creditor banks more responsibility to monitor default risks. They will be punished if they fail to do this job.”

Banks are facing calls to become more active in resolving financial problems in companies after STX Group, the country’s 13th-largest conglomerate, and Tongyang Group, the 38th-largest, defaulted this year.

The FSS said creditor banks should have thoroughly assessed the firms’ debt repayment capabilities before extending loans.

“During regulator inspections, we were focused on checking the financial soundness of banks, and how transparently managed they were. Starting from now, we will check how they are monitoring default risks at debtor companies,” the official said.

Banks have already had to set aside additional loan-loss reserves worth a total of 5.4 trillion won ($5.1 billion) in the first half of this year due to the bankruptcies of large firms. Analysts say a prolonged economic slump has seriously damaged business conditions for major firms, especially in the shipbuilding, construction and shipping industries.

Regulators have urged major banks to strengthen the monitoring of balance sheets of troubled companies over concerns that worsening economic conditions will force more firms to become marginalized.

The FSS said it will inspect the main creditor...