Companies Cry Out Amid Worst Financial Struggles... Banks Burn Amid Financial Crisis Concerns (Comprehensive)

As Applications Concentrate on Prime Companies, Struggling Firms Face Dead Ends
Banking Sector Shares Government Policy but Fears Being Blamed for Insolvency

[Asia Economy Reporter Kangwook Cho] Since the outbreak of the novel coronavirus disease (COVID-19), the government has announced five rounds of measures, providing support worth hundreds of trillions of won, but it is still difficult to find vitality in the real economy. This month, the scale of corporate bond issuance by companies was only half of that of the previous year, and the corporate business outlook has fallen into the worst situation since the financial crisis. In the industrial sector, concerns are growing that small and medium-sized enterprises (SMEs) with relatively low credit ratings are being pushed into the category of zombie companies. There are even concerns that the unexpected shock to the real economy, which has exceeded expectations, is increasing deflation fears, and the rapid increase in potentially insolvent companies could act as a vicious cycle linking the real economy and financial markets, potentially triggering a financial crisis.

◆ Tightening of the capital market worst since the financial crisis = According to the Bank of Korea, the Business Survey Index (BSI) for March fell 11 points from the previous month to 54. This was the largest drop ever, and the index was the lowest since February 2009 (52), when the effects of the financial crisis were at their peak. The index being below the baseline of 100 means that more companies are pessimistic than optimistic. Since the Bank of Korea began compiling related statistics in January 2003, this is the first time the index has dropped by 11 points.

Moreover, the total amount of corporate bonds maturing between April and December is 20.6 trillion won, and commercial paper (CP) amounts to 15.4 trillion won, totaling 36 trillion won. Of this, 20.3 trillion won matures in the second quarter, including 8.9 trillion won in corporate bonds and 11.4 trillion won in CP. To repay maturing corporate bonds immediately, companies must issue new corporate bonds. However, with the issuance scale of corporate bonds in April dropping to 2.7 trillion won, half of the same period last year, the tightening of the capital market has intensified companies' liquidity difficulties, making each day feel like walking on thin ice.

As companies face difficulties issuing corporate bonds, even large corporations have increased their use of overdraft loans, known as "minus accounts," to secure cash. The problem is that the longer the COVID-19 crisis continues, the faster non-prime companies will be pushed into critical situations.

Professor Sangbong Kim of Hansung University’s Department of Economics said, "Prime companies have the capacity to raise funds through the corporate bond market, but the problem lies with non-prime companies with credit ratings below BBB. Rapid financial support is needed for these companies, but since it takes time to assess the extent of their problems, fund-raising is delayed."

◆ Government urges banks to inject more funds = The government is indirectly and directly pressuring banks to support companies by easing various soundness-related regulations and offering immunity from liabilities for bad debts. First, to ease the burden of overseas borrowing by financial companies, the government exempted the foreign currency soundness charge for three months starting this month. The foreign currency soundness charge is a system that imposes a charge on non-deposit foreign currency liabilities with maturities of less than one year and uses the funds as liquidity supply resources in times of crisis.

Additionally, the current foreign currency Liquidity Coverage Ratio (LCR) of 80% will be temporarily lowered to 70% for three months until the end of May. The foreign currency LCR measures the ratio of high-liquidity foreign currency assets to net foreign currency outflows over the next 30 days and is an indicator of a financial institution’s foreign exchange soundness. The forward exchange position limits have been raised from 40% to 50% for domestic banks and from 200% to 250% for foreign bank branches. By partially relaxing financial soundness management, the government is encouraging smooth dollar supply.

The government has also increased the banks’ capacity to supply funds by up to nearly 260 trillion won through temporary easing of soundness and liquidity regulations such as LCR and the loan-to-deposit ratio. Furthermore, the government revised the "Regulations on Inspection and Sanctions of Financial Institutions" to implement an immunity system that does not hold banks responsible for loans and resulting bad debts to companies affected by COVID-19, provided there are no significant procedural defects, to encourage active support.

A financial sector official said, "Whether in won or foreign currency, the goal is to enable maximum fund mobilization while saying, 'We won’t hold you accountable later, so lend a lot.'" He analyzed, "As shown by the current financial support status, policy funds alone have limitations, so the financial sector, especially banks, are expected to play a very significant role."

Regarding this trend, a financial authority official said, "Due to continuous management since the 2008 foreign exchange crisis, the soundness and loss absorption capacity of domestic banks are at an all-time high. If warning signs are detected, it is natural to take management measures, but right now, the top priority is to jointly respond to this unprecedented global crisis."

◆ Banks say no responsibility for bad debts... Government must take proactive action = While banks agree with the government’s stance that they must play as large a role as possible amid the prolonged and entrenched COVID-19 crisis domestically and internationally, they are concerned because the responsibility for bad debts ultimately cannot be shared with anyone else.

An official in the credit department of a commercial bank lamented, "Which bank officer would be able to say later, when bad debts occur, 'Don’t hold me responsible' by citing the government’s immunity measures?"

A senior executive of another commercial bank said, "Companies that used to avoid banks due to high interest rates suddenly started relying heavily on banks as the corporate bond market deteriorated." He added, "Especially for companies that rapidly fell into insolvency due to COVID-19, they prepare self-rescue plans and seek additional loans, but how many cases have there been where self-rescue plans prepared by insolvent companies ended up falling apart? Just as the government and financial authorities draw a line by saying 'self-rescue efforts first' considering fiscal soundness issues in policy fund support for some large corporations, banks also have to be cautious."

Banks are struggling even to minimize the "COVID shock" expected to hit from the second quarter. This is because the impact of the Bank of Korea’s "big cut" (large interest rate cut) is being fully reflected, increasing downward pressure on net interest margins (NIM), and the domestic economy’s recession is expected to deliver a direct blow. According to the Financial Supervisory Service’s data, as of the end of last year, the total capital ratio of domestic banks based on the Bank for International Settlements (BIS) was 15.25%, down 0.16 percentage points from a year earlier. The Tier 1 capital ratio (13.20%) and common equity Tier 1 capital ratio (12.54%) also fell by 0.05 and 0.12 percentage points, respectively. This was due to the risk-weighted asset growth rate (5.3%) exceeding the capital growth rate (4.2% based on total capital).

Therefore, there are calls for the government to take more proactive measures.

Professor Duyong Yang of Kyung Hee University’s Department of International Studies said, "The government and the National Assembly should take more active steps to allow the Bank of Korea to directly purchase corporate bonds. Ultimately, it is a choice between moral hazard or timely fund supply to prevent corporate bankruptcies. The U.S. is implementing bold and proactive policies because its situation is more serious than ours."

This content was produced with the assistance of AI translation services.