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Country Commercial Guides for FY 2000: Korea Report prepared by U.S. Embassy Seoul, released July 1999 Note*

CHAPTER VIII. TRADE AND PROJECT FINANCING

During the financial crisis of late 1997 and the first half of 1998, Korean and foreign banks hesitated to extend credit to businesses, especially for small sized importers. Banks were required to raise their capital adequacy ratios to the BIS required level of 8%. Because of the bankruptcy of large corporations like Hanbo and Kia, private banking institutions were left holding high levels of non-performing loans. Trade financing and letters of credit became more expensive and difficult to obtain for most firms. Over 22,000 small and medium enterprises also went bankrupt during the crisis, further degrading the banks' credit portfolios

On June 25, 1998, the Korean government "suggested" that five healthy commercial banks take over five banks which failed to meet BIS equity ratio requirements (based on purchase and assumption - P&A- formula) as follows: Shinhan Bank took over Donghwa Bank; Housing and Commercial Bank took over Dongnam Bank; Kookmin Bank took over Daedong Bank; KorAm Bank took over Kyungki Bank; and, Hana Bank took over Chungchong Bank.

The Ministry of Finance and Economy, also identified seven other banks which failed to meet BIS equity ratios. These banks were allowed to continue operating until September 1998 on the condition that their viability would depend on a determination by the Financial Supervisory Commission on whether or not the banks' proposed self-rescue plans were adequate to continue to operate. The Commercial Bank of Korea and Hanil Bank subsequently merged to become Hanvit Bank. Chohung Bank, Chungbuk Bank and Kangwon Banks also merged. The Korea Exchange Bank and the Peace Bank successfully implemented recapitalization and restructuring plans, and continued operations.

Traditionally, most of the trade and project financing has gone to large Korean conglomerates, due to the financial security of an already existing immense capital base. The banking industry gave little attention or preference to domestic small and medium sized companies. But through recent initiatives by the Korean government, the Ministry of Finance and Economy has encouraged Korean banks to allot a portion of their overall loans to small and medium sized companies.

Because it is generally expensive to obtain credit, Korean companies request or insist on extended terms of credit. Such favorable terms as open account are requested, even for the first transaction. U.S. exporters should resist such persuasive negotiations by Korean businesses and opt to carry out initial transactions on a secured basis until a mutual business confidence is established.

Brief Description of the Banking System

The present financial system in Korea consists of both banking institutions and non-bank financial institutions. The newly-established Financial Supervisory Commission, and its regulatory arm, the Financial Supervisory Service, is now responsible for the supervision and examination of all banks, including specialized banks and government-owned banks, as well as securities and insurance companies. The Financial Supervisory Commission plays a key role in financial restructuring. It is in the process of strengthening the regulatory and supervisory framework governing the entire financial sector. Supervising standards are improving, but it will be some time before they meet international standards. Audits are generally performed by the Korean branches of international accounting firms, and audit quality is improving. The national deposit insurance system in Korea could be made more robust, but the government has indicated that all depositors would be protected

Foreign Exchange Controls Affecting Trading

In a liberalization plan announced on June 22, 1998, the Ministry of Finance and Economy (MOFE) outlined a program to ease restrictions on capital movements and financial markets through the year 2000. The new Foreign Exchange Transaction Act promises sweeping liberalization of foreign exchange controls in two phases over two years. MOFE described its guiding principles for reform as a creation of a simplified transparent framework and expect full liberalization in line with OECD benchmarks. The first stage of liberalization, implemented on April 1, 1999, included five major changes: (1) a negative list system was introduced in place of the current positive system for capital account transactions; (2) all capital account transactions related to business activities of firms and financial institutions were liberalized, including firms' short-term borrowings from abroad; (3) non-residents were allowed to issue won-denominated securities abroad; (4) all qualified financial institutions were permitted to engage in the foreign exchange business and all restrictions on the money exchange bureau business will be removed; and, (5) participants in the spot and forward markets no longer had to demonstrate their business purpose to purchase forward currency, and a commercial foreign currency brokerage system was introduced.

Second stage measures, to become effective by the end of 2000, will liberalize those capital account transactions that were not liberalized in the first stage, except for those related to national security and crime prevention. This would allow non-residents to invest in won-denominated domestic deposits with maturities of less than one year, and residents to invest in foreign-currency-denominated overseas deposits.

According to the revised Foreign Exchange Management Regulations, a Korean traveler may purchase up to $10,000 to meet foreign travel expenses. An additional $10,000 of overseas expenses per month is authorized for overseas sojourners, including Korean residents staying in foreign countries longer than 30 days for the purpose of business, culture, public affairs, overseas training, study overseas and technical training. Korean residents living offshore longer than two years are now authorized to purchase foreign real estate of up to $500,000 per individual. In addition, Korean residents are now permitted to hold deposits abroad of up to $50,000 for individuals and $3 million for corporations.

Proposed foreign capital remittances are guaranteed when investment approval is obtained. A foreign firm that invests under the terms of the Foreign Capital Promotion Act (FCPA) is permitted to remit a substantial portion of its profits upon providing an audited financial statement to its foreign exchange bank. To withdraw capital, a stock valuation report issued by a recognized securities company or the Korean Appraisal Board must also be presented. Foreign companies not investing under the FCPA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets.

General Financing Availability

The government has exercised tight control over its domestic credit markets, largely to reduce inflationary pressures, but also to meet other economic policy objectives. In the 1970s, the government allocated credit through Korean banks, called "policy loans," at subsidized interest rates to priority export industries and the agriculture sector. In the 1980's the Korean economy showed rapid growth by Korean conglomerates because of their business strategies geared towards growth-oriented expansion domestically and overseas, despite limited output and profit or high debt levels in some cases. The government slowly abandoned the policy loan approach, but did not use its supervisory authority to force banks and other financial institutions to adequately assess credit risk. In the 1990's the government tried to limit loans to 30 large business conglomerates to reduce economic concentrations. However, distortions in credit allocations due to government controls, limited risk-analysis, and tightly bound societal relationships, resulted in high levels of non-performing loans in the Korean banking system.

Medium and short term credit is available from Korean as well as foreign banks, and through the issuance of debentures. Credit, however, is in short supply, and foreign firms must compete with domestic companies, which generally have better access to local funding and informal and secondary financial markets charging high interest rates. Debentures are a financing alternate, although slightly more expensive than bank financing. Long term debt is available from the Korea Development Bank, but generally for high priority industries.

After the recent economic shock, the government decided that its foreign loan system was distorted, and eased its restrictions on long-term credit foreign financial companies. In the past, Korean companies were obliged to obtain approval from the Ministry of Finance and Economy (MOFE) for loans over $10 million with maturities of over one year. As of July 1, 1998, companies need only to notify MOFE of loans over $50 million with maturities over one year.

How to Finance Exports/Methods of Payment

The Korean financial system is perennially hard-pressed to meet the demand for financing and capital. Foreign companies in a start-up operation with a Korean partner often invest capital for the joint venture, while their Korean partner makes an investment in kind, i.e., land or facilities, as the Korean equity. Joint venture companies and foreign firms often work with branches of foreign banks for local currency financing, although the branches of foreign banks occupy a small portion of local market won availability. Other potential sources of financing include domestic nationwide commercial banks, regional banks and specialized banks including the Korea Development Bank, the National Agricultural Cooperative Federation, the Industrial Bank of Korea, and Korea Housing Bank.

There are three documentary practices in settling Korea's imports. These include: (1) sight and usance Letters of Credit, (2) Documents against Acceptance (D/A) and Documents against Payment (D/P); and, (3) Open Account Transactions. D/A and usance LCs are forms of extended credit in which the importer makes no payment for the goods until the date called for in the credit; however, the importer may clear the goods from customs prior to payment. D/P is the same as D/A except that the importer cannot clear the goods from customs prior to payment. In some cases an importer can clear goods prior to payment under a sight LC. LC transactions generally follow standard international UCP codes.

Imports on deferred payment terms, D/A and usance L/Cs, used to be allowed only for specific items such as items subject to specific commercial duties having a tariff rate of 10 percent or less, and crude oil, light oil, and heavy oil. However, this limitation on the types of imports and deferred periods was abolished on July 1, 1998. Imports using installment payment terms used to be allowed for only certain types of products, including goods to facilitate foreign exchange earnings, raw material inputs for export, and machinery used in heavy industries, but these limitations were abolished in July 1998.

The Commercial Service of the U.S. Embassy in Seoul recommends that U.S. companies consider dealing on a confirmed letter of credit basis with new and even familiar clientele. A confirmed L/C through a U.S. bank is recommended because it prevents unwanted changes of the original L/C, and it shifts responsibility for collection onto the familiar banks involved, rather than onto the seller. This may cost you a bit more, but may be well worth it.

Types of Available Export Financing and Insurance

As of 1991, the Overseas Private Investment Corporation (OPIC) refrained from writing policies under its insurance program for companies making new investments in Korea under Section 231A of the Foreign Assistance Act. However, in light of the new economic difficulties in Korea, OPIC announced in June of 1998 that it would resume operations in Korea. OPIC has never had to cover claims for expropriation, political risk or currency inconvertibility in Korea because of the relative stable investment climate. Further, the United States and Korea are negotiating a Bilateral Investment Treaty (BIT). The conclusion of a BIT would provide greater confidence to the American investment community.

Prior to the economic crisis, loans and guarantees from the U.S. Export-Import Bank (Eximbank) of the United States were not commonplace because international trade transactions were being conducted in a stable environment. However, during the height of the economic crisis, many foreign banks were reducing their exposure to Korea. The U.S. Eximbank saw the need to help to ensure confidence in the Korean market. Eximbank agreed to provide short term and medium credit guarantees for capital goods and services. As trade and financing has been a significant problem for Korean importers of American products and services, Eximbank financing could help alleviate this problem.

Since 1987, Korea has been a member of the Multilateral Investment Guarantee Agency of the World Bank Group. The Republic of Korea is a recent graduate of the International Bank for Reconstruction and Development (The World Bank), though it is again a recipient of World Bank loans. Within the World Bank Group, ROK is a member of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The Commercial Service of the U.S. Department of Commerce has a presence at the World Bank Group within the Office of the U.S. Executive Director. Contact information at the World Bank is as follows:

Janice Mazur, The World Bank, The Commercial Service Liaison Staff Office of the U.S. Executive Director, 1818 H Street, NW, Washington, DC 20433 Tel. 202-458-0120/0118, Fax. 202-477-2967 E-mail: Jmazur@mail.doc.gov

List of Major American and Korean Banks in Korea

(Note: Telephone dialing information when calling from outside of Korea: 82 is the country code for Korea, followed by 2 which is the city code for Seoul)

List of American Banks in Seoul American Express Bank Ltd. (Seoul Branch): 15th Floor, Kwangwhamoon Bldg., #64-8,
Taipyungro 1-ka, Chung-ku, Seoul 100-101
Mailing Address: KPO Box 1390, Seoul
Telex: K24484, Tel: 399-2929, Fax: 399-2967

Bank Boston (Seoul Branch): 15th Floor, Kyobo Bldg.,
#1, 1-ka Chongro, Chongro-ku, Seoul 110-714
Mailing Address: CPO Box 313, Seoul
Telex: K23750, Tel: 397-3300, Fax: 733-6989

Bankers Truast Company (Seoul Branch): 12th Floor, Hanwha Bldg.,
#111-5, Sokong-dong, Chung-ku, Seoul 100-070
Mailing Address: CPO Box 7480, Seoul
Telex: K26390, Tel: 3788-6000, Fax: 3788-6071

Bank of America NA & SA (Seoul Branch): 9th Floor, Hanhwa Bldg.,
#1, Jangkyo-dong, Chung-ku, Seoul 100-797
Mailing Address: CPO Box 3026, Seoul
Telex: K23294, Tel: 729-440l/5, Fax: 729-4580

Bank of California, N.A. (Seoul Branch): 12th Floor, Kyobo Bldg.,
#1, 1-ka Chongro, Chongro-ku, Seoul 110-714.
Mailing Address: KPO Box 329, Seoul
Telex: K22815, Tel: 721-1820, Fax : 732-9526

Bank of Hawaii (Seoul Branch): 10th Floor, OCI Bldg.,
#50, Sogong-dong, Chung-ku, Seoul 100-070
Mailing Address: CPO Box 5146, Seoul
Telex: K23589, Tel: 3179-114, Fax: 757-3516

Bank of New York (Seoul Branch): 23rd Floor, Young Poong Bldg.,
#33, Seorin-dong, Chongro-ku, Seoul 100-752
Mailing Address: CPO Box 4906, Seoul
Telex: K29553, Tel: 399-0001/6, Fax: 399-0055

Chase Manhattan (Seoul Branch): Chase Plaza Bldg.,
#34-35, Jung-dong, Chung-ku, Seoul 100-120
Mailing Address: CPO Box 2249, Seoul
Telex: K23249, Tel: 7585-114, Fax: 758-5423

Citibank, N.A. (Seoul Branch): CitiCorp Center Bldg.,
#89-29, Shinmoonro 2-ka, Chongro-ku, Seoul 110-062
Mailing Address: KPO Box 748, Seoul
Telex: K23293, Tel: 731-1114, Fax: 734-5300

First Chicago NBD (Seoul Branch): 15th Floor, Oriental Chemical Bldg.,
#50, Sokong-dong, Chung-ku, Seoul 100-672
Mailing Address: CPO Box 7239, Seoul
Telex: K27534, Tel: 316-9700, Fax: 753-7917

American Banks with a Representative Office in Seoul
First Union National Bank, NA (Representative Office): 10th Floor, Samhwa Bldg.,
#21, Sogong-dong, Chung-ku, Seoul 100-070
Telex: K27966, Tel: 3706-3114, Fax: 3706-3141~3

List of Major Korean Banks in Seoul

Chohung Bank: #14, Namdaemoonro 1-ka, Choong-ku, Seoul 100-091
Telephone: 722-0997 Fax: 733-8904

Hana Bank: #101-1, Ulchiro 1-ka, Choong-ku, Seoul 100-191
Telephone: 2002-1111 Fax: 756-6358

Hanvit Bank: #130, Namdaemoonro 2-ka, Choong-ku, Seoul 100-092
Telephone: 752-9660 Fax: 754-7322

Housing & Commercial Bank: #36-3, Yoido-dong, Youngdeungpo-ku, Seoul 150-010
Telephone: 796-8380 Fax: 769-8293

Kookmin Bank: #9-1, Namdaemoonro 2-ka, Choong-ku, Seoul 100-092
Telephone: 3779-8445 Fax: 3779-8605

Koram Bank: #39, Da-dong, Chung-ku, Seoul 100-180
Telephone: 3455-2545 Fax: 3455-2966

Korea Exchange Bank: #181, Ulchiro 2-ka, Choong-ku, Seoul 100-192
Telephone: 729-8468 Fax: 775-8322

Korea First Bank: #100, Gongpyoung-dong, Chongno-ku, Seoul 110-160
Telephone: 3702-4795 Fax: 3702-4935

Peace Bank: #823-21, Yoksam-dong, Kangnam-ku, Seoul 135-080
Telephone: 2222-2114 Fax: 2222-2234

Seoul Bank: #10-1, Namdaemoonro 2-ka, Choong-ku, Seoul 100-092
Telephone: 3709-5618 Fax: 3709-6440

Shinhan Bank: #120, Taepyoungro 2-ka, Choong-ku, Seoul 100-102
Telephone: 756-0505 Fax: 774-7013