Corporate Viability Determination and Future Action

Under the Financial and Corporate Sector Restructuring Promotion Plan (announced on April 14, 1998), each bank was required to set up a corporate viability determination committee. On a voluntary basis, these committees determined the viability of corporates and under the responsibility of the main creditor banks, creditor banks consulted with each other to smooth out any discrepancies among themselves. The first set of outcomes on corporate viability determination was reported to the FSC through the Banking Supervisory Authority on June 2, 1998.
Although the voluntary assessments by the banks are appreciated, the result itself is somewhat incomplete and seems to need some polishing for the following reasons ;
In particular, non-performing loans of banks need to be dealt with in a swift manner, and banks need to be more aggressive toward liquidating non-viable corporates, since the injection of public funds is inevitable for normalization of financial system.

① Affiliates of the biggest 5 chaebols were excluded from the determination of corporate viability

Although affiliates of the 5 chaebols don’t face loan repayment problems due to the mutual guarantee and the possible assistance at the group level, the soundness of the individual corporate itself or the debt servicing capability of the individual corporate, based on the corporate’s own projects, should also be evaluated.

As such, the procedure of determining corporate viability should include an assessment of future corporate viability based on a more proactive approach. Non-viable corporates are to exit from the market when deemed appropriate.

② As for large corporations which benefited from cooperative loans, some creditor banks were confronted with conflicts of interest and may have postponed proactive decision making. Thus, the misgivings in the financial market could continue to linger.

③ By inviting outside experts to the corporate viability determination process, banks displayed strong initiative. However, due to conflicts of interest among banks some sensitive decisions may have been put off.

That is, just as banks have been refraining from actively extending loans to corporates out of concerns that their BIS ratios may deteriorate, they have been passive in exiting non-viable corporates. Banks also had different opinions among themselves due to their own different interests i.e. the existence of collateral.

Therefore, banks are requested to extend the timeframe in determining the viability of corporates so as to reconsider and supplement their decisions.
① In the case of the 5 biggest chaebols, an assessment should be made and individual corporates should be categorized into three groups; normal, rehabitable or non-rehabitable.

Unsound non-rehabitable corporates shall receive no further loans from banks and should be liquidated at the earliest date.

② In the case of 64 business groups, each of which has outstanding loan balance of 250 billion won or more, the recent outcome on corporate viability determination should be reconsidered and appropriate adjustments should be made to resolve any differences in opinions among banks, while corporates which are to exit should be identified.

③ Large corporates that benefited from cooperative loans should also be reviewed in this regard.

Large corporates that did not obtain final determination due to differences in opinions among banks should be reviewed and a decision should be reached as soon as possible.

④ With respect to corporates that are subject to mediation or court receivorship, at the earliest date possible, main creditor banks should prepare appropriate guidelines on how to deal with those troubled corporates.

In order to facilitate the overall process a deliberation committee comprised of representatives from main creditor banks shall be established temporarily and later, at the earliest date, an arbitration committee shall be set up for the purposes of resolving any differences in opinions among creditor banks.
This process should be completed by and the outcome will be announced by June 20, 1998. Upon completion, the unnecessary misgivings and misunderstandings in the financial markets are expected to be minimized.
With the corporate restructuring in full swing, there is concern of a liquidity sqeeze in the financial market. Supplementary actions should be pursued to relieve small and medium corporates’ liquidity problems.
① Until the liquidity situation of small and medium corporates improve, the Monitoring Unit of the FSC (established on May 15, 1998) will continue to closely monitor the market.

② As done in the case of small and medium corporates, financial institutions will be encouraged to rollover their loans to relatively large corporates other than the 64 business groups.