[Exclusive] Two-Year Delay in Labeling PF Projects as ‘Distressed’ and Tightening Second-Tier Lending... Wave of Regulatory Deferrals to Accelerate Housing Supply

Delayed Implementation of Stricter Soundness and Provisioning Rules in Viability Assessments
Two-Year Postponement for PF Loan Risk Weights at Savings Banks and Credit-Specialized Firms
Easing PF Funding Constraints to Stimulate Housing Supply

Financial authorities have decided to postpone by two years their plan to strengthen soundness assessments and increase provisioning requirements for real estate project financing (PF) sites operated by developers with low capital. The rollout of new risk weights on PF loans for savings banks and credit-specialized financial companies will also be delayed for two years. While continuing the restructuring of insolvent PFs, the authorities will ensure the smooth supply of funds to sites that are either stable or have the potential to normalize, with the goal of revitalizing housing supply in Seoul and the metropolitan area. This move is a follow-up measure focused on the 'supply speed-up' policy outlined in the August 13 real estate measures.

Two-year Postponement of Strengthened Business Feasibility Assessment and Provisioning Regulations for PF

According to financial authorities on September 2, the Financial Services Commission and the Financial Supervisory Service have decided to defer until 2029 the implementation of a system that differentiates PF project evaluation grades and the level of required provisions based on developers' equity ratios, previously scheduled for 2027.

Initially, the authorities planned to introduce the proportion of developers' 'own funds' as a key criterion for assessing the soundness of PF projects. Given that the average equity ratio of domestic developers is only about 3%, the aim was to improve the current structure where projects are run with little capital and most project expenses are covered by borrowing.

Under the original plan, beginning next year, a project would be classified as 'normal' if its equity ratio was below 5%, 'watch' if below 3%, and 'concern' if below 2%. The criteria were to be gradually toughened so that by 2030, the 'normal' threshold would be under 20%, 'watch' under 10%, and 'concern' under 2%. However, the postponement means all these timelines will be pushed back by two years.

The financial authorities decided to slow the implementation because the results of business feasibility assessments directly affect funding for PF sites. If a project's evaluation grade is lowered, financial companies must set aside more provisions, and developers may find it more difficult to secure new financing or extend existing loans. As the authorities already decided to postpone by two years the plan to raise the required developers' equity ratio for PF loans for housing from 5% in 2027 to 20% in 2030, the linked implementation dates for strengthened business feasibility assessments and provisioning regulations have also been aligned accordingly to avoid system mismatches.

Delaying Introduction of PF Loan Risk Weights for Savings Banks and Credit Finance Companies... Reworking Bridge Loan Regulations

The authorities are also considering delaying the introduction of new risk-weight rules for PF lending at savings banks and credit-specialized financial companies to 2029 instead of 2027. Risk weights are a type of 'risk score' applied by financial institutions to loan assets. The higher the figure, the more capital a firm needs to hold against a loan of the same amount, which reduces lending capacity.

Currently, a risk weight of 150% is applied to banks' PF loans. The authorities planned to subdivide this into 100% to 150% bands depending on equity ratios and presale rates, while also introducing similar rules for savings banks and credit-specialized financial companies for the first time. Banks would receive an incentive in the form of reduced capital requirements for high-quality PF loans, while savings banks and credit-specialized financial companies would face new capital constraints not previously applied—an issue that has raised concerns in those sectors.

A financial authority official stated, "Advantages and disadvantages of the risk weight adjustments differ by sector, so we are considering various approaches rather than a simple two-year postponement for all sectors."

As of March, the total outstanding PF loans in the financial sector stood at 115.5 trillion won, with savings banks accounting for 6.9 trillion won and credit-specialized financial companies for 20.2 trillion won. Combined, these two sectors make up 27.1 trillion won, or about 23.5% of the total PF loan balance. Postponing the introduction of risk weights is expected to lessen the additional capital burden on these firms and thereby increase their capacity to provide funding for PF sites.

There are also ongoing discussions about lowering the requirements for extending the maturity of bridge loans, which are short-term loans issued prior to the main PF loan phase. Currently, even for stable bridge loans, more than two maturity extensions require an external professional evaluation of project feasibility and approval from over three-quarters of the loan syndicate. The industry has requested relaxation of these requirements, arguing they hinder loan extensions for sound projects, and the authorities are considering these proposals.

The rationale for slowing the pace of PF regulatory tightening is the urgent need to expand housing supply. While maintaining the medium- to long-term policy direction of restructuring insolvent PFs and improving the low-capital, high-leverage structure of developers, the authorities are determined not to let capital supply to stable or potentially stabilized sites be cut off, which would cause delays in housing starts and supply.

Chanjin Lee, Governor of the Financial Supervisory Service, also ordered at an executive meeting the previous day to focus all available capabilities on financial support for the rapid and large-scale supply of housing. The Financial Supervisory Service has decided to implement special management for 325 major PF sites in the metropolitan area, where housing supply is scheduled through 2027. Individual managers will be assigned to each site to closely monitor project progress and funding conditions. In addition, starting the previous day, the 'PF Financial Difficulty Resolution Center' began operations to gather industry feedback and promote necessary improvements in the system.

This content was produced with the assistance of AI translation services.