Banks Compete for Project Financing

This year, commercial banks have participated in `Project Financing (PF)` that is an investment on social overhead cost and property development requiring long-term finance.

The banks have business strategies to extend the room for profit by participating in this kind of comprehensive finance business. So the market is expected to be competitive more in the future.

▽Commercial banks threatening Industrial Bank= The most active bank for PF is Foreign Currency Bank. The bank loaned 1.063 trillion won on PF in the last year and 2.2 trillion in this year up to 18th of November. Han Sang-han, Vice manager for Investment Finance of Foreign Currency Bank spoke “The bank did not invest on PF actively because of restructuring after foreign currency crisis, but it began to invest on PF actively from the last year.” and added “The bank uses its know-how accumulated in overseas PF.”

Industrial Bank having led project financing have only loaned 1.46 trillion won until the middle of November in this year. About the fact, Lee Hee-dal, the leader for Investment Finance Team of Industrial bank explained “The bank only focuses on PFs that are more than 1 trillion won., so the investment is very fluctuated from year to year.” And added “However, commercial banks tend to invest on PF whose size is 300 – 400 billion won.”

Chohung Bank loaned 262 billion won last year and 720 billion up to now in this year. Shinhan Bank loaned 205 billion won and 754 billion won during the same period.

▽The competition will be severe more in th3e next year=The reason for the banks participate in the PF market is that PF is stable income source in long-term.

Yu Hee-jun, Vice Manager for Investment Finance Team of Kookmin Bank explained “PF is a subject to manage asset stable in long-term with low operating cost. Additionally, there are many commission incomes concerned.” Lee Hee-dal, the leader also added “In case of SOC pursued by private sector, the government guarantees the profits partly. So it is less risky than ordinary mortgage loan.”

However, as the competition becomes severe, the interest rate on loan drops and the profitability becomes getting lower and lower. For example, The interest rate used to plus 2% to `A+` on SOC, but it now drops to 1.5%.

Project Financing is a loan method to loan capital for a profitable project and if the project succeeds, the bank receives principal and profits. It differentiates from ordinary mortgage loan by focusing on business profitability.

Kwu-Jin Lim mhjh22@donga.com