South Korean financial authorities are discussing incentives, such as adjusting the soundness classification criteria or investment limits on securities, to inject new funds into real estate project financing (PF) companies experiencing temporary liquidity difficulties.

The move is seen as encouraging active participation from financially sound banks and insurers to revitalize PF operations.

There are also concerns that the real estate sector is receiving excessive financial support, prompting authorities to devise ways to redirect these funds to other industries moving forward.

Financial industry sources said on Monday that the Financial Services Commission and the Financial Supervisory Service will announce a PF normalization plan in mid-May 2024 that will include measures to benefit financial institutions injecting new funds into viable PF projects during the restructuring process. Authorities conducted PF-related conferences by industry in April, when they reviewed the proposed incentive measures.

Discussions on the PF market’s future also took place during a recent macroeconomic and financial meeting held on Friday that was attended by Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok, FSC Chairman Kim Joo-hyun, Bank of Korea Governor Rhee Chang-yong, Financial Supervisory Service Governor Lee Bok-hyun, and Land, Infrastructure and Transport Minister Park Sang-woo.

They exchanged ideas on measures suggested by various sectors that could be announced in the future.

“As part of the PF normalization measures, we are considering raising the soundness classification criteria for new loan funds or relaxing the ratio regulation,” a financial authority source said.

One suggestion from the meeting is classifying the assets’ soundness as normal when new funds are injected into viable PF projects. Assets are classified into five levels ? normal, caution, fixed, recovery uncertain, and estimated loss ? and a commensurate portion of the loan amount must be set aside as a loan loss provision. A provision of 20 to 30 percent is required for fixed loans but this is reduced to around 0.85 percent for normal loans, thus reducing the burden of new investments.

The government is also considering temporarily increasing investment limits. Bank investment limits in securities are currently tied to 100 percent of their capital, for example, but this could be relaxed for a set period. Employees at PF companies will not be charged with negligence for errors in their work if there are no significant procedural defects, and the business evaluation criteria for both normal and distressed PF projects is also under review.

For its part, the FSC and FSS will launch a real estate finance task force with the Korea Institute of Finance moving forward. The team will focus on examining the soundness of financial funds invested in the real estate market from a mid to long-term perspective.

By Chae Jong-won and Lee Eun-joo

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