South Korea May Buy 3.5 Trillion Won of Bad Construction Loans

South Korea may buy as much as 3.5 trillion won ($3 billion) worth of deteriorating loans next year that were made by savings banks to builders and developers.

“We plan to use a significant amount of the 5 trillion won corporate restructuring fund budgeted for next year to purchase construction project loans from savings banks,” Chang Young Chul, chief executive officer of Korea Asset Management Corp., told reporters today. Chang was last month named CEO of the government agency, which deals with distressed assets.

Korean banks’ profits are being hampered by rising costs relating to bad building loans. Korea Asset, also known as Kamco, aims to buy as much as 3.5 trillion won worth of loans extended to fund real-estate projects that have gone sour or are likely to do so, Chang said. The plan requires parliament’s approval.

Kamco purchased 4.7 trillion won worth of impaired construction loans in the first 10 months of this year, almost double the 2.4 trillion won spent for all of 2009, a statement from the company showed today. A weaker real estate market has eroded loan quality at the nation’s smaller savings banks as well as larger commercial lenders.

Profit at South Korea’s 18 commercial lenders declined 6.9 percent in the third quarter from a year earlier on rising bad- loan costs, mainly from construction projects, the Financial Supervisory Service said on Nov. 1.

To contact the reporter on this story: Seonjin Cha in Seoul at Scha2@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.