`Bad bank` to buy $3.6 bln in distressed real estate loans

A bad bank about to emerge under a government move to handle distressed real estate loans is expected to acquire 4 trillion won (3.6 billion U.S. dollars) worth of non-performing loans held by financial institutions this year.

The amount is about 40 percent of the combined non-performing project financing loans held by the financial sector last year.

While the Financial Supervisory Service in collaboration with five commercial and three specialized banks is considering setting up a bad bank by the end of June, they will initially purchase soured PF loans extended by bank consortiums, banking sources said Tuesday.

The immediate priority is to restructure large companies that borrowed money from bank consortiums rather than individual banks.

The amount of non-performing real estate PF loans was 9.74 trillion won (9 billion dollars) last year, with PF loans in the banking sector worth 6.4 trillion won (5.8 billion won). Among banks’ PF loans, 4 trillion won (3.6 billion dollars) were extended by consortiums.

Participating banks will contribute funds to the bad bank according to the size of their bad real estate loans, with contributions expected to reach between 500 billion won (458 million dollars) and 1 trillion won (917 million dollars) on “capital call” demand.

Capital call refers to banks making capital contributions on demand by bad banks based on the money promised in a previous capital commitment.

“UAMCO, a private bad bank, made a capital call worth 1 trillion won (917 million dollars) and credit line contract upon establishment, but operates with contributions a bit less than 500 billion won (458 million dollars),” said an official at the financial watchdog.

The contribution amount is not necessarily big since a bad bank can buy non-performing loans at a discount, turn them into normal loans, and resell them to buy additional non-performing loans. If the real estate market worsens, however, PF non-performing loans can go up to 10 trillion won (9.2 billion dollars), which in turn can increase bank contributions, the official said.

Opinions differ among banks on the establishment of a bad bank, which makes it difficult to set up a concrete plan. Banks with little exposure to bad loans feel no need to set up a bad bank.

“The decision will be made after negotiations among banks since a proposal has been made by UAMCO, which buys troubled assets from banks," said a source from the Financial Supervisory Service.

cha@donga.com