Countdown to 'PF Normalization Plan' Announcement... Financial Authorities to Hold Two Weeks of Meetings with Financial Sector

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The financial authorities, preparing a normalization plan for the smooth landing of the real estate project financing (PF) market, have entered a verification process to enhance its effectiveness. Aiming to announce the normalization plan within April, they appear to be conducting face-to-face meetings with multiple financial institutions to fine-tune details such as criteria for selecting distressed projects, measures to activate auctions and public sales, and new funding supply plans for projects with recovery potential.

According to the financial authorities on the 11th, the Financial Supervisory Service (FSS) will hold individual or sector-specific meetings with major commercial banks, mutual finance institutions, specialized credit finance companies, savings banks, and insurance companies by next week. On the 9th, a confidential meeting was also held with chief risk officers (CROs) and PF division executives from nine major securities firms, including Mirae Asset Securities and Korea Investment & Securities. A financial authority official explained, "We plan to collect opinions by sector and financial institution regarding the real estate PF normalization plan by next week," adding that working-level personnel from each sector will follow the schedule.

During the meetings scheduled until next week, the FSS is expected to reconfirm the status of PF projects by sector and financial institution. Since the forthcoming normalization plan will involve 'sorting the wheat from the chaff' among PF projects, it is necessary to clearly distinguish between projects with high viability and distressed ones.

Plans to provide new funding support to real estate PF projects with proven viability are also expected to be widely discussed. Since the beginning of this year, the financial authorities have urged the financial sector to strengthen risk management, including additional provisioning, to ensure a smooth landing of the PF market, while carefully considering specific new funding support measures to prevent risk from spreading to ongoing PF projects.

Previously, the financial authorities expanded the PF project guarantee scale of the Housing & Urban Guarantee Corporation (HUG) and the Korea Housing Finance Corporation from 25 trillion won to 30 trillion won. They also announced the establishment of a 4 trillion won non-residential PF project guarantee centered on the Construction Guarantee Association, aiming to supply a total of 9 trillion won to the market. Additionally, an 8 trillion won financial support plan for construction companies was outlined. Kim So-young, Vice Chairman of the Financial Services Commission, recently met with the construction industry and emphasized, "Real estate PF is an area where construction and finance are interlinked, and the burdens of high inflation and high interest rates can affect not only the construction industry but also the financial system. Therefore, mutual cooperation is important, and the government also needs to make meticulous policy efforts."

Measures to activate auctions and public sales for the prompt resolution of distressed projects are also expected to be discussed. The financial authorities are reportedly pushing to subdivide the current three-tier classification of 'Good (normal asset soundness classification) - Normal (watch list) - Deterioration Concern (substandard or below)' into four tiers: 'Good - Normal - Deterioration Concern - Doubtful Recovery.' They plan to set minimum provisioning rates for PF loans by project status as follows: Normal (2%), Watch List (10%), Substandard (30%), Doubtful Recovery (75%), aiming to induce the resolution and restructuring of distressed projects through auctions and public sales.

The financial authorities plan to finalize detailed adjustments after these meetings and then announce the normalization plan to the market. Following a meeting between the financial sector and the construction industry in Yeouido, Seoul, on the 21st of last month, FSS Governor Lee Bok-hyun told reporters, "We will publicly announce the PF normalization plan within April," adding, "Actual implementation will reflect the opinions of the Ministry of Land, Infrastructure and Transport and the construction industry, aiming for execution in May or June."

Meanwhile, during the confidential meeting with major securities firms on the 9th, the FSS reportedly listened extensively to the views of securities firms, which generally hold subordinated creditor positions, to activate auctions and public sales. Subordinated creditors face significantly limited recovery of funds compared to senior creditors when loan projects go through auctions or public sales, often having to bear considerable losses.

[Image source=Yonhap News]

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