Korea set to tackle rising 'zombie companies'

The number of "zombie companies" in South Korea has risen sharply over the past five years, data showed Wednesday, with the financial authorities set to take preemptive action to tackle any impact from their sudden collapse.

The number of zombie companies, which do not generate enough operating profit to pay tax and interest payments or require constant bailouts, stood at 3,295 as of end-2014, up from 2,698 in 2009, according to the data compiled by the Bank of Korea.

The percentage of such troubled companies rose to 15.2 percent last year from 12.8 percent five years earlier.

Separate data by LG Economic Research Institute showed that out of 628 listed companies excluding financial firms, 34.9 percent failed to make sufficient profit to pay down the principal on their debt, up from 24.7 percent in 2010.

The Financial Services Commission and the Financial Supervisory Service, the financial market governing and oversight bodies, have announced strict measures to deal with the zombie menace problem amid growing economic uncertainties, including slowing growth in the Chinese economy and a looming U.S. interest hike.

FSC Chairman Yim Jong-yong has called for immediate action to eliminate such ailing firms and reduce mounting corporate debt as they could lead to a series of bankruptcies, much like during the 1997 Asian financial crisis.

The FSC and FSS will have local banks tighten their corporate loan screening system and clean out bad debts in order to remove zombie companies from the market and improve the balance sheets of creditor banks.

The authorities said banks who do not write off bad corporate loans will be required to set aside additional bad loan expenses and their employees will receive penalties in their performance ratings.

"We will encourage local banks to carry out sweeping reform in a timely manner after wrapping up regular corporate credit risk assessments later this year," said an FSC official. (Yonhap)