FSS to Revise Main Debtor Group "Scoring System" for the First Time in Seven Years

Considering Industry-Specific Characteristics in Restructuring Sectors Such as Petrochemicals
Overhauling the Evaluation System with Tailored Standards by Industry
Potential Exceptions for Temporary Financial Deterioration or Borrowings for Future Investments
Easing the Burden on Companies Expected

The Financial Supervisory Service (FSS) is set to overhaul the Main Debtor Group System for the first time in seven years. The FSS is reviewing changes to its "scorecard" approach, moving away from the existing evaluation method that failed to sufficiently reflect differences across sectors, and instead aiming to incorporate industry-specific characteristics. In particular, there are discussions on how to reflect the demands of the petrochemical industry—which is currently undergoing business restructuring amid a structural crisis—in the evaluation process.

According to financial authorities on March 24, the FSS has formed a task force (TF) involving the Korea Federation of Banks and major creditor banks to discuss improvements to the Main Debtor Group System. Under this system, in accordance with the Banking Supervision Regulations, business groups with large amounts of debt are selected annually and managed integrally by their main creditor banks. The designation of these business groups is based not only on bank loans, but also on all forms of borrowings such as corporate bonds (CP), trade bills, and privately placed bonds. As of last year, most major domestic conglomerates—including SK, Hyundai Motor, and Samsung—were included.

Business groups designated as main debtor groups are subject to financial structure evaluations by creditor banks. If it is determined that financial improvements are necessary, the group must sign a "financial structure improvement agreement" with the bank, which leads to comprehensive management of its operations. If a company is assessed as having high financial risk, the FSS conducts its own financial risk assessment; based on the results, new credit to affiliated companies may be restricted and existing payment guarantees may need to be dissolved. The financial structure improvement process may require asset sales, reduced investments, and other restructuring measures, so companies have long considered both the designation as a main debtor group and subsequent inclusion as a financial structure improvement target to be significant burdens.

The core of this overhaul is to more precisely reflect industry-specific characteristics during the evaluation of companies targeted for financial structure improvement. The FSS is currently considering ways to segment financial risk assessment standards based on each industry’s circumstances. Under the current system, financial structures have been judged according to the same criteria, with little regard for differences among industries.

The main impetus for this policy change has been the strong voices from the petrochemical industry, which is currently undergoing restructuring. The sector is facing a downturn due to oversupply from China and a global economic slowdown, prompting intensive business restructuring. As a result, these companies are experiencing temporary increases in losses and borrowings. If the current standards are applied as-is, these companies are highly likely to be classified as targets for financial structure improvement agreements. Industry stakeholders have consistently argued that it is excessive to categorize financial deterioration during future-oriented restructuring as simple insolvency and thus subject it to such agreements.

The FSS appears likely to consider measures that reflect these demands—such as taking industry-specific characteristics into account and allowing certain exceptions for companies whose financial statements have temporarily worsened due to restructuring processes or who have taken on debt for future investments. However, there is internal debate within the FSS, as applying different standards by industry could raise fairness issues.

The Main Debtor Group System was introduced in 1999 after the foreign exchange crisis to prevent the insolvency of large corporations from spreading throughout the financial system. In 2019, the system was revised to incorporate "total borrowings," including market-based funding such as corporate bonds, and to introduce an evaluation system based on consolidated financial statements that reflect overseas operations.

An official from the FSS stated, "We are carefully considering a variety of improvement measures after fully gathering feedback from industry stakeholders."

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