Financial arms of large enterprises will face tougher restrictions from next year in funding their parent firms against default, the financial regulator said Thursday, in a move to close the loophole through which conglomerates divert their affiliates’ assets to avert liquidity squeeze.
Money-lending units affiliated with conglomerates will only be able to offer their largest shareholders loans of an amount equivalent to 100 percent of their equity capital, beginning in the first half of 2014, the Financial Services Commission said at a briefing.
The FSC is also considering banning moneylenders from extending any credit to their controlling stakeholders or other affiliates if their parent firms are financial companies themselves.
The regulator’s move came as excessive and arbitrary lending by financial units to their parent companies has been partly blamed for the spate of corporate defaults in South Korea in recent months.
The latest was the liquidity crisis of Tong Yang Group, South Korea’s 38th-largest family-run conglomerate, which filed for court receivership of some of its key units after the firm failed to repay debts.
It was later discovered by the financial authorities through a probe that Tongyang Securities Inc., the brokerage unit of Tong Yang Group, had been providing liquidity to the troubled firm, incurring massive losses for individual investors.
In a bid to prevent big firms from taking advantage of their financial units as a private vault, the FSC has been focusing on drawing up necessary measures to revamp related rules.
The FSC is mulling placing local moneylenders under its watch.
In Korea, moneylenders are subject to regulations stipulated by the regional governments.
On the sidelines of the corporate overhaul, the regulator will look into introducing a separate credit rating on a company, which is calculated based on the assumption that the firm is excluded from any financial support, the FSC said.
The FSC is also considering requiring large firms to disclose their borrowings besides bank loans ― the outstanding amount of commercial papers and hybrid bonds ― to give creditors better understanding of the company’s risks. (Yonhap News)
