Since the 1997-1998 Asian Crisis, South Korea's banking industry -- the supplier of cheap credit to the country's recklessly managed chaebol -- has undergone a radical transformation. The workforce and branch operations of the sector were slashed by a third. Several of the weakest banks simply ceased to exist. The government spent some $130 billion to clean up the bad loans at financial institutions. Foreigners got the green light to buy into local banks. A profligate chaebol, Daewoo Group, was eventually denied further bank loans.
A record to be proud of. Yet, judging from recent events, it is still a record at risk.
Case in point: the mid-June effort by banks and major shareholders to forge a multibillion-dollar bailout for an insolvent SK Global. The trading house of South Korea's third-largest conglomerate, SK Global started to founder earlier this year under an unsustainable debt burden of $7.2 billion -- largely owed to Korea's banks. Chey Tae Won, its young chairman, was thrown in jail on charges of committing accounting fraud. Chey pleaded guilty to the fraud charge. Prosecutors also charge that he tried to siphon funds from stronger affiliates to keep weaker ones going, but Chey maintains that's common corporate practice.
No one denies, though, that SK Global is in deep trouble. The proper response for a creditor bank in this case would be to seize whatever collateral it legally can and write off any debt that cannot be recovered. Such a move would reassure a bank's shareholders that it can disentangle itself from a major mess.
One Korean bank has done that. Kookmin, the nation's largest bank, agreed to sell off its SK Global loans for 30 cents on the dollar, writing off the 70% remainder at a cost of $264 million. "We believe [that] removing uncertainties is in the best interest of our shareholders," says Baek Kwang Ho, a deputy general manager at Kookmin.
But the other banks are ready to risk further exposure to the mess. They've supported a bailout of SK Global that involves debt-for-equity swaps, rescheduling debt, and cutting the interest charged. Wildest of all, they want guarantees that other parts of the SK chaebol will ramp up the services they purchase from SK Global to keep their weak sister company afloat.
Long before the crisis developed, the banks made chieftain Chey Tae Won personally guarantee the debt payments of the weaker SK units. As the SK Global scandal broke, Chey had to offer all his various SK shareholdings to the banks. It wasn't enough.
The remedy by the creditors? Kim Seung Yu, Hana Bank chairman, representing all the exposed local banks, pleaded with the Seoul criminal court to release Chey from jail so he could pressure SK Corp., SK Telecom, and other healthy affiliates of SK Global to bail out its sick sister. At least the courts ignored the plea. "The SK case is testimony that things have changed in Korea. But it is also the confirmation that the industry still has a long way to go," says Scott Seo, banking analyst at J.P. Morgan Chase & Co.
Even Hana Bank's Kim admits that banks must work harder to improve their corporate clients' transparency. But, he adds, "our immediate priority is to recover loans as much as possible, and I'm not prepared to give that up for the cause of better corporate governance."
The sad part is that Kim, in one sense, is right. The system in Korea is still skewed enough to let a scandal like SK Global erupt. And banks like Hana are tremendously exposed: Hana could lose about half its estimated 2003 pretax profit if it writes off all its SK loans. In a case like that, the temptation to resort to the old remedies is tremendous. Almost anything is better than taking such a hit.
At least the government is impartially letting the banks, the company, and competing shareholder groups slug it out to determine SK Global's fate. "This is the most encouraging indication that the market is beginning to function," says Shin In Seok, a banking expert at the Korea Development Institute, a state-funded think tank. Most encouraging of all would be if Korea's banks finally learned the lesson of the crisis: Good governance saves money -- for creditors and borrowers alike. By Moon Ihlwan