Savings banks had failed to fulfil their role as a financial channel for local consumers due to the aftermath of the Asian financial crisis. Large banks, insurance companies, and specialized credit firms have taken over the customer base of savings banks. Some savings banks, therefore, aggressively increased their share of investment in high-risk assets such as real estate project financing loan and securities. The risk of the savings banks industry intensified.
To such backdrop, the government carried out a large-scale restructuring of the savings banks industry to prevent savings banks from posing a crucial risk to the financial system. In September, 2011, Samhwa and Busan Savings Banks were restructured, and other 7 savings banks including Jeil and Tomato followed the suit in the latter half of the year. Moreover, the government issued a business improvement order to 4 savings banks including Solomon in May 2012.
As a result, it is expected that savings banks can reposition themselves as a local microcredit financial channel if they successfully seize market opportunities and put in more efforts to normalize business, though it is prospected to take quite a significant time to return to the level prior to the Asian financial crisis. In particular, mid-sized savings banks which have been concentrating on securing local customer base are showing descent improvement in their business performances.
Despite that it is still too early to discuss outcomes of the government’s massive restructuring of the savings banks, it is evaluated that the savings banks industry is now facing a turning point for a new start as a local microcredit financial channel. Moreover, we believe that the significant improvement of savings banks’ massive deficit is a encouraging outcome worth paying attention to. 82% of the real estate project financing loan, which has been pointed out as a major risk factor, was written off as of the end of 2013. BIS capital adequacy ratio reached 11.2% at the end of 2013 from 5.6% in 2011.
After restructuring 30 insolvent savings banks since 2011, the current number of total savings banks stands at 87. Furthermore, the government institutionalized private loans by allowing sound credit businesses to take over savings banks. As a result, maximum private loan interest rates decreased to 20% from 34.9% and it is expected that consumer protection to be strengthened.