Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12125 PERFORMANCE AUDIT REPORT KOREA INDUSTRIAL FINANCE PROJECT (LOAN 2309-KO) SECOND INDUSTRIAL FINANCE PROJECT (LOAN 2571-KO) JUNE 30, 1993 MICROGRAPHICS Report No: 12125 Type: PPAR Operations Evaluation Department This document has a restricted distribution and may be used by recipients only In the performance of their ofliWd duties. Its contents may not otherwise be disclosed without World Bank authoization. CURRENCY EOUIVALENTS Currency Units Korean Won (U) (annual averages) 1981 S$1 V U 681.03 1987 US$1 W U 822.57 1982 US$1 W U 731.08 1988 US$1 * W 731.47 1983 US$1 * W 775.75 1989 US$1 a V 671.46 1984 US41 w 805.98 1990 US$1 - W 707.76 1985 US$1 W U 870.02 1991 US$1 - W 733.35 1984 US$1 * V 881.45 1992 US$1 w 780.65 ^BBREVIATIONS AND ACRONYMS sOE - Bank of Rorea CD - Certificate of Deposits CH& * Cash Management Accounts CPS - Currency Pooling Sy stem DYC - Development finance Companies DFI - Development Finance Institutions DMB - Deposit Money Bank ERR - Economic Rate of Return FRR - Financial Rate of Return TSPL - Financial Sector Policy Letter (IPP2) 8c1 - Heavy and Chemical Industries 1PPI - (First) Industry Finance Project IFP2 - Second Industry Finance Project RAIST - Korea Advanced Institute of Science and Technology I81 - Korea Banking Institute KDB - Korea Development Bank XDB-OBS * MDB - Outline of Development Strategy for 1983-85 KEXIM - Korea Export-Import Bank ELB * Korea Long Term Credit Bank ELB-DS - ELB - Development Strategy for 1983-84 E=CC - Korean Management and Credit Rating Corporation LIBOR - London Inter-Bank Offered Rate LDP - Letter of Development Policy for The Financial (IfP1) MOF - Ministry of Finance MSB - Monetary Stabilization Bonds NBFI - Won-Bank Financial Intermediaries NIF - National Investment Fund OBS - Office of Bank Supervision OED - Operations Evaluation Department OTC - Over The Counter (Securities market transactions) PAR - Performance Audit Report PCR - Project Completion Report PCR-IFP - PCR - Industrial Finance Project PCR-IFP2 - PCR * Second Industrial Finance Project SAL - Structural Adjustment Loan SAR - Staff Appraisal Report SAR-IFP - SAR - Industrial Finance Project SAR-IP2 - SAR - Second Industrial Finance Project SDI - Subsidy Dependence Index SMI - Small and Medium Industry RP * Report and Recomendation of the President RRP-IfP - RRP - Industrial Finance Project RRP-IFP2 - RRP - Second Industrial Finance Project VEF - Won Export Facility FISCAL YEAR January 1 to December 31 Ia 11än 11 e121 i Ch sil11 VOR OFFCIAL USB ONLY PERFORMM ADDIT RPR (Loan 2309-KO) SECOUD INDUSTIAL fINANCE PROJECT (Loam 2571-O) UABLE oF COTENTS PAmE 0. ROR1A9 C AUDIT REPOR PEFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASICDATASEET . . . . . . . . . . . . . . . . . . . . . . . . . . i I. ECON(mIC ARD SECTOR UA RUNiD . . . . . . . . . . . . . . . . . i A. ajorMacro.conomicTrende 1980-1992 . . . . ........ B. Major Trende In Induatrial Sector Døvelopmanta: 1965-1992 . . 2 C. Developmntin th F1nancial 8ector. ...... ...... 5 II *OREA: THEDUSTRIAL FINANCE PROJECT . . . . . . . . . . . . . . 9 A. Background . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Introduction .s. 4. 4 . . . . .4.4. . 4 .444 9 Project Objective* ..... ...... ........ . 9 Con~et, Deølgn and Rational .il ....... 1 B. Progres in Meeting Stated Objectives .......... .. 13 Atta±mmnt ofi aUe ObjectLve . . . . . . . . . . . . . . . 13 Extent of Adherence to Loan Condition . . . . . . . . . . . 20 C. Operational and VIna~ial Performance of Projeat Entiti@ . . 22 EDB9sPromne....... 22 aL' Performane. . .. .. . ..e.. . . . 26 KBI*. Performace . . . . . . . . . . . . . . . . . . . . . 28 D. Vinding* and leams. . . . . . . . . . . . . . . . . . . . . 29 Overall A9es*sm~e t . . . . . . . . . . . . . . . . . . . . . 29 Project Identifløation, Appral*al end Design Ises . . . . 30 Loan Conditio Iaue . . . . . *............ . . 31 Projet Supervion Isss . . .. .. . .. .. .. .. . 32 Impact of Bank ~sscation . . . . . . . . . . . . . .. . 32 Sustaluability of Landing Operations . . . . . . . . . . . . 33 Leson of xperiene ... ... .. .. .. .. . .. .. 33 Ths document has a resticted d~stributon asd may he usd by «wcpi~ts only in the prfbance of oficial dutis. Its contests may no otherwie bo dh~closed without Wid Bask authoriton. TABLE OF COMTENTS (Cont'd) PAGE NO, III. XQROA*I THBMSE00HD INDUSTRIAL FIANC _PROJECT . . . . . . . . . . 35 A. Background . . . . . . . . . . . . . . . . . . . . . . . . . 35 Introduction . . . . . . . . . . . . . . . . . . . . . . . 35 Project Objectives . . . . . . . . . . . 36 Concept Design and RatION al . .. . . . ..... .. 37 B. Progress in Meeting Stated Objectives , . . . . . . . . . . . 39 At*- mtof lasi* Objectives * * * * * 39 Extent of Adherence to Loan Conditions . . . . . . . . . . 50 C. Operational and Financial Performance of Project Entities . . 52 XDB*eaPerformance.. . . ** * * ** * * 52 1LB* Performance . . . . . . . * * * * * * * * * * * * * 53 D. Findinge and Issues . . . . . . . . . * * * * * * * * * * * 54 Overall Assessment .................... 54 Project Identification, Appraisal and Design Issues . . . . 56 Loan Conditionslssues ....... * * * * * * * * * * 57 Project Supervision Issues . . . . ... . . . . . . . 59 Impact of Bank Association .. .... * * * * * * * * 59 Sustainability of Lending Operations . . . . . . .... . 60 Lessons of Experience . . . . . . . . . * * * * * * * * * * 61 STATISTICAL AMX * .* * ******* 63 Table 1. Structure of Financial Liabilities of Korean Enterprises ... . . .*.* a * * * * * * 65 Table 2. Siplified Structure of Financial Liabilities of Korean Enterprises . . . . . * * * * * * * * * * 66 Table 3. Financial Ratios of the Korean Manufacturing Sector . . 67 Table 4. 1LB9* Funding Sources (outstanding as of end year) . . 68 Table 5. LB's Funding Sources (in Z of total amounts) . . . . . 69 Table 6. Interest Rates Differentials in Korea 1980-92 . . . . . 70 Table 7. Real Interest Rates . . . . , . . * * * * * * * 71 Table S. Government Schedule for IntLrest Rate Deregulation . . 72 PART 1. PROJECT REVIEW FROM BAWS PERSPECTIVE . . . . . . . . . . . 73 1. Project Identity . . . . . . . . . . . . . . . . . . . . 75 2. Project Background . . . . . . . * * * * * * * * * * * * 75 3. Project Objectives and Description . . . . . . . . . * * 76 4. Project Design and Organization . . . . . . . . . . . * 76 6. Project Implementation . . . . . . . . . *. . . . . . 77 6. Projact Reeults ..* * * * * * * ********** 79 7. Project Sustainability . . . . . * . . * * * * * * . 82 8. Bank Performance . . . . . . . . e * * * * * * * * * 83 9. Borrower Performce . . ... * * * * * * * * * * * 63 TABLE OF CONTENTS (Cont*d) 10. Project Relationship . . . . . . . . . . . . . . . . . . 84 11. Project Documentation and Data. . . ........ .0 84 12. Main Lessone . . . . . . . . . . . . . . . . . . . . . . 84 PM1. PROJECT REVIEW FRM 8OUWER'S PERSPECTIVE . . . . . . . . 85 1. Korea Development .t . .... ... .... . . 85 2. Korea Long Term Credit Bank . ............. 87 PART III. STATISTICAL INFOMATION . . . .. . ... 89 1. Related BankLoan...... . . . ......... . 89 2. Project Timetable. . . . . . . . . . . . . . . . . . 90 3. Cumulative Etimated and Actual Disbursements . . . . . 91 4. Project Implementation . . . . . . . . . . . . . . . . . 92 4.1 Sectoral and Geographic Distribution of Subprojects (EDB) .. . . . . . . . .. . . . . . 92 4.2 Sectoral and Geographic Distribution of Subprojects (LB) . . . . . . . . . . . . . . . . . . 93 4.3 Summarised Data on Economic Contribution of Subprojects (KDB) .. . . . . . . . .. . . . . . 94 4.4 Summarized Data on Economic Contribution of Subprojects (KLB) . . . . . ...... . . . . . 96 5. ZDB's Financial and Operational Performance . . . . . . 98 5.1 Summary of Operations . . . . . . . . . . . . . . . . . 98 5.2 Projected and Actual Balance Sheets . . . . . . . . . . 99 5.3 Projected and Actual Income Statements . . . . . . . . . 101 5.4 Projected and Actual Indicators of Financial and Operational Performance . . . . . . . . . . . . 102 5.5 Domestic Currency Resource Mobilization . . . . . . . . 103 5.6 Foreign Currency Resource Mobilization . . . . . . . . . 105 6. ELB's Financial and Operational Performance . . . . . . 108 6.1 Summary of Operations . . . . . . . . . ........ 108 6.2 Projected Balance Sheets ....... .. . . . . . . 110 6.3 Actual Balance Shet . . . .. ...... .. ... . 112 6.4 Projected Income Statements . .. . .. . ....... 114 6.5 Actual Income Statements .... .. . ...... .. 115 6.6 Projected Ratio Analysis.. ........ . . . . . 116 6.7 Actual Ratio Analysis . . . . . . . . . . . . . . . . 117 7. Statue of Bank Covenants . . . . . . . . . . . . . . . . 118 8. Use of Bank Reseources ...*.............. 122 A. Staff Inputs . . . . . . . . . . . . . . . . . . . . 122 B. Missions . . . . . . . . . . . . . . . . . . . . . . 122 mUsTRIlAL rnCE POJEC (LOA 2309-1O) SECOND IEUSTRL FINANCE PROJECT (LOAl 2571-RO) 1. Thio is the Perfomance Audit Report (PAl) for two loe. extenaded by the World Bank to Korea duri~g the 1982-90 period the Industrial pinance Project (Lomn 2309-0): and gSwond Industrial Flumnee Project (Lomn 2571-0). both loan aiQ at liberalising the financial sector and developig the industrial sector in Korea, and the fude are eoAmel-A trough the sme financial inteamadiaries, Korea Devlopment lank (ED) end Korea Lng Ter Credit ~ank (L). 2. Industrial Peno Projecta 1 end II in the amouts of US$255.0 million and US$222.0 milbion respectively vere approved June 9, 1983 and June d, 1985. There vere cancellatimns of US$2.J milim and US$44.9 milbi for these two lon. The flnal diabursements were ade on bby 16, 1988 ~nd Oetober 1, 1990. The two loan vere closed om December 31, 1988 and September 30, 1990. 3. This PAX was prepared by the Operations Evaluation Departmsnt (CED). Aa m3D aission visited Korea in October 1992 and discussed the effectivenes of Bank assistance vith Government officials and representatives of the business and financial eommunty. Their kind cooperation and invaluable assistance during the mision is gratefully acknowledged. 4. The PCe were prepared by the Industry end Eergy Operations Division of Country Departomte 1 and III, East A~ia and Palfie Regiomal Offiee, with Part II contributed by th* Zorro~er. Th PaR attempts to complement the PCR by providing a more precise asssmnt of the financial setor policy component of the project, and by focuwing on the foreign exehange risk carried by the final borrower. The PAI also zoasure the degree of subsidisation of the ftisncial intermediaries under the loan. 5. The report was *ent to the Borroer in draft form for their review nd reaction; however, no coments wers received. - it - EIA INustRMA FINAcE RoJact (LOAN 2309-10) BASIC DATA SO LOANL POSMTON (Amounts in US$ Million) As of January 31, 1993 Lean Original D uriased Canceled Renld Outstanding 2309-R0 255.0 252.69 2.31 235.73 16.96 CUALATIVE ESTIMATED AND ACTUAL DISBURSEMENTS II8A II85 II8A 7 2Y8 Appraisal Estimate (US$E) 33.3 157.0 243.0 255.0 2!5.0 Actual (USSM) 22.3 141.3 207.5 242.7 252.7 Actual as of 2 of Appraisal (2) 67.0 90.0 85.4 95.2 99.1 Date of Final Disbursements May 16, 1988 PROJECT DATES Oriinal Actua Identification 07181 07/81 Preparation 06181 06181 Pro-Appraisal 06/82 05/82 Appraisal 05/82 11/82 Post-Appraisal 02/83 04/83 Negotiation 05/83 05/83 Board Approval 06/83 06/83 Loan Signature 06/83 06/83 Loan Effectiveness 08/83 09/83 Loan Completion 12/86 12/86 Loan Closing 12/88 12/88 stage of Proect CT0e miE i UR EA U DZ Uml ml mi al Preparation 10.6 19.2 29.8 Appraial 0.4 74.6 75.0 8gotiation 6.1 6.1 leuding Operatons 71.3 37.4 108.7 Superviion 1.2 13.5 5.7 7.6 1.4 3.6 3.5 36.7 Completion 0.7 1.8 2.5 Adenalatration 0.5 3.5 0.5 3.3 1.1 7.9 Total 82.3 139.0 17.0 6.2 10.1 3.2 3.6 5.3 266.7 MufiSSONDATA No. of No. of Staff Konthixear veegkøeros Etlf Through Appralsal 06/81 .a 1 05182 2.8 9 25.2 AppraLaal through board Approval 11/82 4.2 5 21.0 02/83 n.a. 4 n.a. 04/83 2.0 1 2.0 Board Approval through Effectivenesø 07/83 n.a. i n.. 08/83 1.4 2 2.8 Supervision 1 03/84 2.8 2 5.6 Supervision II 06/84 4.2 1 4.2 Supervision 111 04/86 2.8 2 5.6 Supervision IV 03/87 2.0 1 2.0 Supervision V 03/88 2.0 1 2.0 -TE PROJECT DATA Project: Second Structural Adjustment IAan Project Loan No.: 2354-KO Amount: U$300.0 G~l11on Board Datew 11/08183 groject: Secoud Indutrial Via Proje t Loan No.: 2571-to åmunt: U8$218.0 mau11n loard Date 06/06/85 Projet: ~ill and s~dinm Indutr Projet 1an No.: 2515-ED Amount US91.0 ml0ial Board D te" 04/16/85 SECON IUZsTRIAL nANCE PnoJact (LOAN 257140) BASCT& SUEE (Amounts in US$ Million) As of January 31. 1993 kman &Uftal Disbursed Canceled eaid 1standin 2571-0&1-RO 218.00 173.06 44.94 123.58 49.48 MNLATIVRJESTIMATED AND ACTUAL .DISDBUNTS Appraisal Estimate (US$H) 13.2 83.6 158.4 200.2 Actual (US$N) 15.8 59.9 136.3 176.5 Actual as of I of Appraisal (2) 119.7 71.7 86.0 88.2 Date of Final Disbursements October 1, 1990 Otinal Actual Identification 03/84 03184 Preparation 06/84 06/84 Project Brief 09/84 11/84 Appraisal 10/84 10184 Negotiation 05/85 04/85 Board Approval 06/85 06/85 Loan Signature 09/85 10/85 Loan Effectiveness 11/85 12/85 Loan Completion* 12/87 06/88 Loan Closing 09/90 09/90 * According to Schedule 2 of the Loan Agreement the Project vas expected to be completed by December 31, 1988. But Form 590 shows December 31, 1987 as the Completion Date, which was the last date of receiving subloan applications from 1DB and ELB. * vt - stag of zPCas.sesc CFOA 0SA 0AA 0AZ ESA 0A. WAS 0al 022 arAS 0a. .2 a.4 Apprateal 56.3 56.3 Negottations 7.8 7.8 endug Operattoas 2.0 53.0 S5.1 Superviftou S.9 1.0 5.3 0.6 2.1 1.3 17.1 Completton 0.3 1.0 0.4 4.0 3.7 Adftalstratou 3.9 1.2 5.8 Anal RevIew 1.7 1.7 Total 12.2 128.3 9.8 5.4 5.3 0.9 3.1 1.7 4.0 170.6 MISSION DATA No. of No. of Staff MthJYear ][esm Peraone ]fgeks Through Appraisal 06184 4.8 7 33.6 Appraieal through Board Approval 10/84 4.8 8 38.4 03/85 2.2 5 11.0 Board Approval through Effectivenese - - - - Superviston I 04/86 2.4* 2 4.8 Form 590 09/86 ** ** ** Supervieton 11 03/88 2.4 1 2.4 OT=R RECT D Related Loan Project: Small and Medium Industry Project Loan No. 2515-RO Amounts US$41.0 million Board Dates 04/16/85 * Combined time for both Industrial Finance Project I and II (Loans 2309-1O and 2571-K0). ** Annual update of the Project Implementation Summary (without involving a field visit). - vil - UIOMANCO ADIT -ROMT (Loan 2309-RO) SRCMN ==DSTI& FINAMCE n=J (Loan 2571-10) &YAUATED SIawky 1. This Porformance Audit Report TIM USTRIAL FINANGS PRJT4M (PAR) covers two loans aimed at sup- 2309-QO porting policy reform and Institution- a1 strengthening in the Korean Gov- I eament financial sector policy re- form, and Korean industrial invest- 3. This project was appraised In the ats. Because they were trying to early 1980., When the GoVerAGet In- reach similer objectives, in coopers- tended to transform a dirigiste finan- tion with the same project entities, cial system into a more market orient- and because they largely overlapped, ed one. At that time the Government these projects are being assessed had privatized publicly-owned banks, together. permitted the establishment of a new private bankv reduzed the Government 2. Both projects were successful in prerogatives to appoint senior bank several ways. They helped a wide range officers, and reduced entry barriers of industrial enterprises to modern- for non-bank financial intermediaries. ise and upgrade their capital equip- Because the Bank had emphasized, at ment. They assisted Korean financial least since 1979, the used to reform intermediaries and the Ministry of Kores financial Institutions ad Finanss to improve the skills of their processes, and had already financially staff and familiarize them with some supported industrial modernization sophisticated financial techniques. through IDB and ILD# there was a joint The projects helped the Ministry of interest in going ahead. A loan amount Finance to have an adequate system for of US$ 255 million wa made to the computerizing data on financial trans- Korean eovernment on the condition actions. They also encouraged KDB and that it would ouland (i) US$ 130 mil- ILB to use appropriate appraisal tech- lion to KDB1 (i1) US$ 120 million to niques, enhance their management cri- KLB; and (ill) US$ 2.5 million to 01 teria, and diversify their activities in order to provide training to staff domestically and internationally. of supervisory agencies and selected lowever, for both projects, the Bank financial Institutions. The remaining was less successful in supporting the US$ 2.5 million would be used by the reforms of the orea's financial eye- Ministry of Tinance to establish an tam. advanced software to handle natliiuide finnucial transactions. * Viil - Proect Objectives In a4dition, IDS had to maintain: a 10s1 maximum debtlequity ratio, & 4. The project was based upon three mintsum 2% spread on its loans based major objectivess on commeria foreign currency borrow- In$, and a ainImum return on equity. (a) a policy component aimed at It also had to report to the Bank Its supporting the Goverrment0s financial borrowing In foreign currency. RLS sector policy reform objectives, par- had to maintain a 12:1 maximum ticularly those to be implemented over debtlequity ratio, report to the Bank a two-year period 1983-1985. Such it. cof4nsncixg with foreign coer- objectives were listed in a Letter of cial sources, and require its auditors Develooment Polior for the Financial to express an opinion as to the ade- Seca= iseued by the Minister of Pi- quacy of provisions for bad debt. nance. The letter mentioned: (c) the technical ass istance cam- * the deregulation of interest ponent was intended to strengthen the ratess financial sector through a technical assistance, component of US$ 5 million, * the liberalization of comercial of which US$ 2.5 million would cover banksthe foreign exchange requirements of an overseas program to meet the train- * the revision of the banks' su- Ing needs of financial supervisory pervision system; agencies and of selected financial Intermediaries, and another US5$ 2.5 * the reduction of directed credit million would cover part of the cost in the economy; and of consultants hired to set up a system for computerizing data on fi- * the reduction of the corporate nancial transaction. sector's Indebtedness. ImIglmation and Results (b) a credit component to support high priority Industrial Investments S. The credit component was used through financial intermediation by satisfactorily. 143 subprojects were YDB (UJS$ 130 million) and ZL (US$ 120 financed using a total of US$ 247.7 million). EDS and MLB were comitted million of IBRD funds. US$ 2.3 million to onlend the proceeds of the credit was unused and canceled. Despite the component: questionable quality of calculated FMI and ERR, and other subprojeOct (1) at the Bank's standard vari- related performance Indicators, DB'. able interest rate plus a 22 spread; and ILB*s exerience in project s- lection and supervision was a major (ii) to medium to large scale en- aset for the successful terprises with a sound financial of the credit component. Hameer, the structure and a masimu 4.5*1 development of unfavorable market and debtlequity ratio; and institutional condition. led the Bank to progressively relax the constraints (iii) without exceeding a US$ 10 it imposed on RDB and XLl. Such relax- million ceiling on individual subloans ations facilitated further dis- and, at the ase time, abiding to a bursements of the loan but worked *free limit" rule set at US$ 5 mil- against the objective of promoting a lion, higher level of financial discipline into these two strategic Korean eian- * Ex - cial Intermediaries. ondi were discontinued. The Govern- ment began to reduc, the anwual flow 6. The technical astatance component of fund. channeled through the Nation- was satisfactorily Implementeds KBI al Investment Funds but the volume of monitored and organised the training policy loan* and Its share In total of the staff belonging to 21 Korean domestic credit Increased aan after financial institutions and to the &oF. 1985 AIST effectively designed, tested and developed the copucer data proceseig (o) legarding LqMM=* ludebod- system ordered by the ol. noe and 2=J1tghIlitv# It appear. that Korean enterpries have benefit- 7. The financial sector policy compo- ted more from record level, of foreign nent had mied reults. Because the exchange earnings through Increased Goverment was left with complete exorts than from specific govemen- tactical and strategic freedom con- tal measures. The bulk of corporate emning the adequate means and dates debt reduction Is based Indeed on to Implement the reform, having only substantial reductions In foreign to periodically inform the sak on the debt. and trade credit. Improvement. progres achieved, the Bank was left in the profitability of manufacturing without appropriate benchmarke to enterprises are al.o more related to assese the quantitative and qualita- the boomimg economy than to *pecific tive achievement., and without lever- Goverrment decisions. age to eventually impart a different direction. The main results were as Susainabilti followes 8. F rom the Industry development (a) Apart from the introduction of polut-of-view, the operation is sus- a more flexible band system of loan taiable to the extent that imports of rate charged by the banke, the lift- foreign equipment and technology have Ing of the ceiling, on interbank call been embodied In dometic production rates and on ung ranteed corporate factor., bringing the Korem Industri- bond., and the reduction of the eaxi- al sector Into a better position to a lending rate charged by banks, achieve productivity gains. On the intrest rate remained largely admin- financa policy sideg the Intended Istered during the reviewed period. liberalization of Interest rate. and reduction of directed credit was, not (b) Regarding the b ation achieved. As sh from the Subsidy of coMerial banks, the Government Dependence Index (SDI) analysis, IDS progressively placed foreign banks on and KLB relied Government financial an equal footing with domestic bankst subsidies. In addition, DD capability and widened the scope of commercial to earn a net incm out of borrowing banks' business. However, no major and lending activities wa. not streng- decision was taken to Introduce more thened, (par. 2.22). These factor. competition between banks in relation make the sustaftability of the entire to their usal banking business. operation uncertain. (c) No significant change was in- laine and Lessons troduced in the evatem of eservieion of financal Intermediaries. 9. Tb Industrial 11nonce Project we. one of the most Important Bank opera- (d) Initial Government efforts tions in Kore. Because IDR# JU and aimed at reducing the size, of directed KBI are mature and reliable Intitu- *x- tions, the credit component and the million was made to the Government of technical assistance component were Korea. The Government would onlend (i) Implemented as expected, even though US$ 100 million to IMIs (it) US$ 120 some lending conditions on DMI finan- million to K; and (III) US$ 2 mil- cial discipline were relaxed. On the lion to KBI to provide training to the policy side, the Government was left staff of participating financial In- with room to manoeuvre to Implement stitutione and concerned Government the reforms. The liberalization was agencies. slow, and, as a result, the achieve- ments of the policy letter fell short b of expectations. 12. The project was based upon objec- 10. Three lessons may de derived from tives similar to those of IPP1: the Industrial Finance Project: (a) a policy component aimed at (a) The Bank*s flexibility in supporting the Government's financial implementing lending conditions may sector reform through 1987. The relat- work against the incentive role of ed objectives were listed In the some of the conditionalities intended Government's Financial feator Poligx to support DPI financial discipline. Letter, and dealt with: (b) The lack of deadlines, timeta- interest rate decontrol; bles and of a proper sequencing of the phases of the reform can be a source *liberalization of comercial of delays in Implementing reforms. banks and improvements in their super- vision$ (c) Mixing financial support to industrial enterprises with support to reduction in size and proportion a financial policy reform program can of directed credit; yield very high benefits, but it is also a risky undertaking. In this control of corporate Indebted- case, the intended liberalization of ness; and interest rates and reduction of di- rected credit was not achieved (paras equity market development. 2.12 and 2.16). (b) a credit aomponent would pro- vide foreign exchange funds to IDS TH SEC=.INDUSTRIAL FINANCE PROJECT (US$ 100 million) and KID (US$ 120 ( Nmillion) which would onlnd the pro- ceeds to financially and economically Intro2t viable enterprises to purchase abroad adequate equipment. Onlending ar- 11. The project was identified in rangements were subject, for both KDB March 1984, when the first Industrial and 11B, to s Finance Project (IPL) was still in its early phase of implementation. It (i) manaiig a 22 spread was conceived as a follow-up opera- above the effective borrowing cost; tion, and when the Staff Appraisal Report was drafted, it was based on a (it) selecting enterprises with a very limited knowledge of the results sound financial structure and a maxi- of I1t1. A loan amount of US$ 222 mum debtequity ratio of 4 25:1; (iii) respecting a US$ 12 million Increased from 4s5tl to Sil, the maui- ceiling on individual subloans and mum subloan se was increased from abiding to a "free limit" rule set at US$ 12 million to US$ 15 million. US$ 6 millions Despite these adjustments important difficulties persisted. Rven though (1v) maintaining, in their own IL as still able to offer to its balance sheets, a maximum long term clients a commercially attractive debt/equity ratio set at 10:1 for RDB blend of IBID funds and Won currency and 15:1 for ELB; and funds, ILB faced substantial prepay- ments. Its clients vanted to get rid (v) furnishing to the Bank their of these loans# because their repay- audited annual financial statements, ment term became too unfavorable. On not later than 6 months after the end the other hands 1DB's disbursements of each fiscal year. still lagged behind schedule. Loan cancellations were agreed at various In addition, XDB had to maintain a dates starting from September 1, 1987, minimum 2% spread on its lending oper- amounting ultimately to a total of US$ ations out of foreign commercial 38.9 million. borrowing, and an interest rate structure enabling it to earn a rea- 14. As for the final outcome, the loan sonable yield on its equity. financed 96 subprojects instead of 150 as planned. KDB finally used US$ 61.1 (c) a technical assistance com- million to finance 34 subprojects, and ponent, in an initial amount of US$ 2 KLB used US$ 111.9 million to finance million, to help financial institu- 62 subprojects. Despite RDB$s and tions operate in more complex and com- 1LB9s expertise, the economic perfor- petitive environment. Conditions at- mance of subprojects is unclear. RLB tached to this component were similar does not adequately report actual ex to those of the 1M11 training compo- post FRRs and 11Us.; RDB financed sev- nent. oral subprojects with FM and RM well below the opportunity cost of Inalementation and Results capital. 13. Implementation of the credit com- 15. The institution buildUn component ponent proved to be difficult at the corresponding to DBIs Outlin, of beginning. Because this loan over- Development Strategy (1985-1990) and lapped with the IPP1 lending opera- to MLIs Development Strategy paper tion, ZDB had still a substantial 1985-1986 was satisfactorily achieved* amount of uncommitted funds out of except for RDBs profitability and 111. Also, the Bank did not adequate- level of capitalization. ly put the project into the macroeco- nomic perspective, e.g. the transition 16. The technical assistance component from deficit to surplus in the cur- benefitted from a US$ 2 million In- rent account balance in 1985-86 or, crease In January 1988 and from an beginning in February 1985, the de- additional period of disbursements to cline in the US$ exchange rate September 1994. Assessments of this against major currencies. The Bank component are therefore premature. reacted by adjusting the loan condi- However, information provided by KB1 tions both for EDB and RLB as for and by the NoF Indicates that the 1M 1. The onlending spread was reduced program seems to be progressing satis- from 21 to 1%, the maximum debt/equity factorily. ratio of eligible subborrowers was * xit - 17. Achievements under the lic tily lifted, the control* over the comonent were well below expects- banks vere reinforced. The overall tions. The evaluation mission iden- result is certainly a decline of the tified a dominant factor: the govern- share of policy loans in total domes- ment relied upon the continued devel- tic creditl but a decline which, opment of non-bank financial interme- structurally, remains unsatisfactory. diaries to Instill more competition into the financial system. During the reviewed period, the share of non-bank (d) Equity market development. financial intermediaries in the than- Governmental measures aimed at a more cial system increased sharply and transparent stock market and at better accounted for more than 60Z in 1990. access to the OTC market have probably As a results helped. However, the booming economy is the major explanatory factor for (a) During most of the period, the remarkable developments of the liberalization of commercial banks re- market during the reviewed period. ceived much less governmental atten- When the boom came to an end, the tion. The Government just increased market stabilized. the number of participating banks in various market segments. The Govern- Sustainability ment did not structurally change the rules of the game from a mostly car- 18. Conclusion are identical to those telistic structure into those of a made for IPPI (see para. 8). genuine competitive structure. In ad- dition, no significant measure was Findims and Lessons taken, until 1990, to strengthen the supervisory role of the Office of Bank 19. Considered together, the two loans Supervision of the Bolt. (o. 2309-10 & 2571-10) supplied nearly half a billion dollars to the (b) Interest rate decontrol. Korean economy. The Bank made a second Whereas most non-bank lending rates loan to the same project entities were decontrolled, bank interest rates before the first loan was completed. remained tightly controlled. The Gov- As a result the absorptive capacity of ernment attempted to liberalize inter- the finsucial conduits wa exceeded. est rates in 1988, but reversed the Moreover, the Bank did not expect (i) policy the following year, as the that the international financial mar- market rate increased with tight mone- ket conditions (eg. international tary control. Only in 1991 the Govern- interest rates) would bea,Me so unfa- ment published a full program of in- vorable; (11) that the macroeconomic terest rate deregulation with a time- environment (e.g. the state of Rorea*s table, deadlines and an adequate se- Balance of Payments) would deeply quencing. However, there is no indica- modify the foreign currency require- tion that the program was linked to ments of Korean enterprises. When such previous discussions with the Bank, in events occurred the Dank relaxed the the framework of the U11 and IFP2 conditions of its loans at some cost operations. of reducing the financial discipline in the project entities. There were (c) The reduction of size and also substantial loan cancellations. proportion of directed credit also af- At best, the final borrower. made fected unevenly the banks and the non- large prepayments, allowing themselves banks. Whereas the government credit to get rid of an unwanted foreign ex- controls over non-banks were substan- change risk embodied in the Currency - Kill Pool System (CPS). for this conclusion w that the SARs for both loans reaffirmed their "em- 20. To a large extent the Bank's etra- pbasie on financ sector issues, tegy and the Korean Government's stra- leaving the Industrial Issues to the tegy were not consistent. The Govern- smallest share" Once thie bias Is met relied on the development of the revealed It is clear why the report non-ank financial subsystem to Intro- places an Inordinate emphasis on the duce more competition into the overall policy component end less of an empha- financial system. The Bank mostly sis on the credit component (see also focused on the liberalization of g par. 2.6). If it had been recognized 5gJ&l banks to make the Korean fi- that the loans were used priarily to nancial sector more market oriented. finance Industrial projects through two majorF development finance Institu- 21. The three lessons drawn from tions and further to use these loans the first Industrial Finance Project as a vehicle for discussing financial (UIFP) still hold for the Second sector policies with the Government of Industrial Finance Project (IP2). Korea (GOK)q perhaps the conclusions However, specific circumstances which of the report would have been very characterized the IFP2 lead to two different. We are In agreement with additional lessons: the conclusion that from an Industry development point of view, the loans (a) At appraisal, a full assess- appear to be sustainable (pera. 2.51 ment of the macroeconomic environment and 3.52) Howevr, certain conclu- must be made, including the likely sions such as "mixing financial sup- taplications on the financial sector port to industrial enterprises with policies and the project. support to a policy reform program is a risky operation and should be avoid- (b) Solutions should be sought ed" (para. 2.52 a) are not substanti- to introduce more compatibility be- ated as to what are the Inherent risks tween the mechanics of the CPS and the of these loan products. Furthermore, borrower's needs to adequately hedge the conclusion that "on the financial against foreign exchange risk. sector side, the operation appears to be loe sustainable" (para. 2.51), has no basis". COtETS 80= .BANK REGIONAL STAFF 23.* "The World Bank Policies OuidinM 22. The Operations Evaluation Depart- Financial Sector ggeratkMg of April aent (OED) received valuable comments 26, 1991, makes It clear that the Bank from the Bank Regional Staff during uses FILs to "promote the development the preparation of the Evaluation of participating intermediary institu- Report. The final comments are report- tions (Flo), to support financial ed belows sector reforms, to help catalyze the broadening of financial markets, and ... The Preface of the PAR does to support reform objectives in the not contain a single reference to the productive sectors (para. xiii of the fact that these loans are financial paper)." intermediary loans. In addition, the report states that, these projects 24. "As stated In our andum of were de facto financial sector adjust- May 11, 1993, the policy development ment loans, "without carrying the letter Issued by the ON outlinin usual constraints attached to this area of reform, reform objectives and type of loan" (para. 3.6). The basis measures the o intended to take re- flected an understanding, and were not jects were clearly sustainable. In a conditionality for the loan. These addition, despite problems with the two loans are well within the guide- Curvewq Pool System and some cancel- lines of the Bank for FILe, and it lotions, both financial institutions would be incorrect to review them are robust and will survive in a de- under the assumption that they are Ag regulated environment. To the extent fgASo FSALS. The PAR, however, has that these two loans allowed the Bank misinterpreted the nature of these to maintain a dialogue with the G01 on loans to assume that they were SAL financial sector reform that has re- rather than IL, in turn negating the sulted in a substantive reform plan validity of their conclusions on fi- that even exceeds the recomendations nancial sector reform. As you are of the Banks the projects have satis- aware, not a single FSAL was approved factorily achieved additional objec- in 1985#. tives .." 25. "With reference to the Bank's ORD roggonse role in reforming the financial sector in Korea, the PAR suggests repeatedly 27. Several of the comments were taken that the Ban has played a marginal into account In the final report: (i) role in this process (see for example the reference to the project as being pars. 2.49, 3.14, 3.16 or 3.51). a de facto financial sector adjustment However, the latest financial reform operation has been deleted (para 3.6); program announced on May 27, 1993 by (ii) more clarity has bean brought in the 00K, as a rart of its New Economic the discussion on sustainability of Five-Year Plan substantially follows the operation (para 2.51); and (iii) a the policies and the time period of more balanced view has is now offered implementation as recommended in the on the issus"of -4xin policy dialogu Financial Sector Study of February 2, with financial intermediation lending 1993. This result would not have been (pare 2.52). possible had the Bank not established a channel for communication through 28. However, the above mentioned com- earlier financial intermediary loans ments from Regional staff indicate such as the industrial finance loans. that they still have two substantive While the timstable for reform as differences with the conclusions of envisaged during these two loans was the PAR and the rating of the second different from what was expected by project. The OED position on these the Bank, the content and specific major points are as follows: actions that have been outlined in the new 00K plan are clearly a result of (a) Do w audit the two vr2iets the interaction that took place be- FSAU ox as FILs? tween the Bank and the 00K over the last decade". The Staff Appraisal Reports (SARs) of both projects indicate these projects 26. "As we had stated in our earlier are more than ILe because they carry memo, the fundamental objective of the a policy letter, and they are less two loans was to finance industrial than PSs, because they do not in- investments and strengthen two key cude financial sector conditional- development financial institutions ties - 4D IM the situation is the (Korea Development Bank and lorea same: the Loan Agreements refer to the Long-Term Bank). To this end, we agree policy letter and the adherence of the with the PAR conclusion that the in- Gornment to its execution. The Bank dustry/credit component of both pro- an also exert remedies if the reform - Xv - program set forth in the letter is not (b) Did the BWk% glaved a mal or role carried out, but the Loan and Project in refgML4W the financial sector-U Agreements do not Include any tian- &oXea LIMough fnWW Interedar oial sector related covenant.The pro- LqUAinat posed rating is based on an analysis of the relevance of objectives and Bank documents and records do not program achievements. The Audit ad- provide enough evidence to respond dresses the question of ISAL versus positively. Sector vork preceding FIL in the context of the relevance of project preparation was Incomlete and the project objectives and eoncludes outdated. During project prepuratior that, in this particular case, mixing of the second project, the scope of FIL with FSAL features was risky. The the Bank reform program was reduced Audit does not use FSALIFIL criteria and arrangements to monitor the reform for program performance assessment. process were canceled. Moreovert there The Audit rather refers to the program is little evidence of policy dialogue objectives stated in the SARs. These during supervision. 031 field inter- objectives are multiple: financial views indicate a coherent and steady sector development, ILB and KDB insti- Government approach to financial sec- tutional development, industrial de- tar reforms In Korea during project velopment. The Audit compares facts implementationg but priorities at- with objectives and concludes that tached to objectives and use of policy target achievements have deteriorated instruments differed from what the over time, to the point that the sec- Bank was promoting through the pro- ond project is rated as unsatisfacto- jects. The Bank may have played a sig- ry. nificant role in supporting financial sector reforms in Korea through other channels (e.g. the recent Bank So quoted in the Pi). OD may review the impact of this support in future eval- uation work. (LOAN 2309-Vo) SIODIMUMMUIL ZI3U PRLJEM (LOAN 2571-10) 1. ECONOMIC AND SECTOR ACKGROUND A. Malor Macroeconomic Trends 1980-1992 1.1 Thirty years ago, Korea was among the poorest countries, heavily dependent on agriculture, with perennial balance of payments deficits financed almost entirely through foreign grants. However, CDP growth averaged 9.9 percent during 1965-1980 and 9.7 percent during 1980-1990, and Korea's per capita income increased from US$ 80 in 1960 to US$ 5,400 in 1990. The manufacturing sector characterized by a strong outward orientation has been the major engine of growth. With a share of manufacturing in total merchandise exports rising from about 602 in 1965 to about 952 in 1990, Korea has largely based its success in economic development and industrialization on a strategy of export promotion with emphasis on manufactured exports. 1.2 Korea was in a good position to benefit from world economic recovery and declining oil and commodity prices after 1982. During 1980-1986, GDP &rwt averaged 9.1Z p.a. in real terms. This performance is due to a focus on produc- tivity achievements and remarkable efforts aimed at curbing the inflation rate. The index of gross production per worker in the manufacturing sector (1980 - 100) jumped from 40 in 1970 to 146 in 1986. As a result of effective stabilization policies in the early 1980s, the inflation rate averaged 17.72 p.a. during 1973-1980, and fell below 62 p.a. during 1980-1986. Over 1986-1988, the country experienced an economic boom. Supported by favorable external factors such as low oil prices, the low value of the won and low interest rates, real GDP growth reached 12% in 1986 and remained at 11.5% p.a. In 1987 and 1988. After 1988, Korea had a major shift in the source of growth: domestic demand rather than the external sector started predominating. Sluggish export growth contributed to reduce GDP growth to 6.2% in 1989. This rate rebounded to 9.22 in 1990 and decreased slightly to 8.4% in 1991. Recent lackluster performance in exports has been due to an erosion in export competitiveness in terms of price and quality. Although the index of gross production per worker in the manufacturing sector still increased in 1987 and 1988, this increase came to a standstill in 1989, and progress in productivity has been more than offset by the growth of nominal wages in the manufacturing sector. In addition, bottlenecks in technology upgrading contributed to erode Korean competitiveness. 1.3 Another cause of economic success is the structure of aaregate dometic demand. In 1965, consumption was about 942 of GDP. This share declined to about 80% in the mid-1970s and to about 75Z in the early 1980s. A declining -2- growth rate of Total Consumption resulted in an increased growth rate of domestic savings, which reached about 251 of GDP in the early 1980s. This trend supported a parallel Increase in investments: from about 152 of GDP in 1965, Gross Domestic Investment rose to about 252 in the aid-70s and to above 301 In the early 1980s. With an ICOR averaging 3.6 during 1973-1980, the country was able to generate over the years substantial additions to GDP. The trend continued to develop during 1980-'990. Gross Domestic Investment reached 372 of GDP in 1990, and the ICOR Iaproved again to 3.2 during 1980-1991. Not surprisingly the country continued to exhibit substantial progress in GDP growth. Nowever, during the 1980-1990 period, savings may not have been efficiently channelled towards investment through the domestic network of financial Intermediaries. 1.4 During the 1970s and early 1980., orea's balance of 2aments was characteris 4 by current account deficits. The deficit peaked at US$ 4.4 billion in 1980. The 1980s however recorded major changes. The country decided to tackle this issue, as soon as 1980, by depreciatin the exchange rate by 202, and abolishing the fixed exchange rate system1. Then, Korea made efforts to increase its integration in world trade. It initiated (in 1983) trade reforms involving a gradual reduction of restrictions on Imports and the application of roughly uniform tariffs across different types of Iaports. As a result of trade reforms and stabilization policies, the current account balance deficit declined steadily to 1 percent of GNP in 1985. In 1986, supported by the decline In oil prices and the appreciation of the Japanese yen, the Korean economy accumulated a current account surplus of US$ 4.6 billion. In 1988 the current account balance peaked at a US$ 14.2 billion surplus. In addition, Korea's external debt position improved during the 1980s. Its external debt declined from a peak of US$ 47.1 billion in December 1985 to US$ 33.1 billion by the end of 1989, and all debt ratios improved accordingly. However, this trend has been reversed over 1989-1991, partly due to the previously mentioned structural factors affecting the external competitiveness of Korea, and partly to the lagged effects of the appreciation of the won. Since 1987 the authorities let the currency appreciate in order to contain the external surplus and emerging price pressures. Between 1987 and 1989 the real effective exchange rate appreciated by nearly 27 percent. Korean firms lost some competitiveness in traditional labor intensive export items against countries such as China. The current account balance turned to a deficit of US$ 2.2 billion in 1990, and worsened further to a deficit of US$ 8.8 billion in 1991. External debt rose to US$ 34 billion in 1990 and further to 39.3 billion in 1991, the highest since 1987. B. 1aior Trends in Industrial Sector Deelonments: 1965-1992 1.5 The industrial sector has been the core of Korea's development strategy. The strategy appears clearly from the figures belows ' From 1975 to 1979, the exchange rate was fixed to the US dollar. -3- Distribution of Grnts Domestle Irgdul ad Averata Annual Growth Rate (1965-19901 Jgg5 IM =ga I= 1965-0 1980-85 1985-9 Share of GDP (1) Average Annual Growth (1) Industry 25 39 41 45 16.6 9.6 9.6 - Manufacturing 18 28 28 31 18.8 9.6 9.9 Other Sectors 75 61 59 55 9.5 7.9 10.2 Soarcess The World Bank, World Development Report, various issues. 1.6 The Korean industrial structure is characterized by large and powerful conglomerates (the "cheabol" or "jaabol"). The strategic Iportance of such conglomerates has been emphasized in several studiesv and more specifically in a 1987 World Bank Report entitled "Korea - Managing the Industrial Tranition1. By the mid-1980s, the top 50 firms accounted for more than one third of output, a concentration considerably higher than that of either Japan or Korea's major competitors. The concentration of industrial production was evident even below the largest 50 or 100 firms. On the trade side, concentration was even more pronounced as the nine officially designated General Trading Companies accounted for almost 50Z of Korean exportal. The existence of conglomerates has important implications in several key areas: efficiency (including industrial integration and subcontracting relationships), international competitiveness, and economic management at various levels (coordination between public and private enterprises, credit distribution). 1.7 Korea's industrial strategy has also been characteried by major shifts among the leading sectors. The successful takeoff of the economy was achieved through light manufactured eorts (1961-1973). After 1973 Korea progressively faced rising protectionism in industrialized countries against light manufactured goods from developing countries and New Industrialised Countries. To achieve long-term development objectives, the Government decided to accelerate structural change through the promotion of Reavy and Chemical e.g.: L.JONES and 11 SAKONGs Government, Business and Entrepreneurship in Economic Developments The Korean Case, in Studies in the Modernization of the Republic of Korea, 1945-1975, Cambridge, Mass, Harvard U.P., 1980. & The World Banks Korea, Managing the Industrial transition, Vol 1: "The Conduct of Industrial Policy" (182 p.); Vol.2: "Special Topics and Case Studies" (225 p.). Washington D.C., A World Bank Country study, 1987. V The World Bank, Korea, Managing the Industrial Transition, op. cit., Vol. 1, p. 121. - 4 - Industries (MCl). The O8CI drive" (1973-1979) contributed to a significant restructuring of the economy for the following decade, and the Governments direct intervention in the economy deepened. The goverament targeted industries to be developed (steel, metal products, electronics, shipbuilding, automobile, petrochemical and machinery production) with the objective that, by 1980, these industries would account for more than 502 of Korean exports and fcr a larger share of value added. More Important, the Government developed controls over credit and industrial finance to reach these objectivess policy lending, preferential finance, subsidized Interest rates, and establishment of the National Investment Fund (Nl). As a result, by the early 1980s the industrial structure was substantially reshaped. Conglomerates grew successfully in tron and steel industries (POSCO), in consumer electronics and electronic components (SAHSUNG, LUCK! GOLDSTAR, HYUNDAI), in shipbuilding, and In automobiles (DAENW, 8YUNDAI, RIA), but were less successful in petrochemicals and heavy aachinery. Overall the ICI sector increased its share in total output from about 11.5% (.975) to about 16% in 1983. 1.8 !- the early 1980., Korean authorities recognized that, even though the targeted jbjectives physically materialized, the success was frequently obtained at a high economic cost. Acknowledging that the increased complexity of the industrial sector would require other methods than the centrally-directed approach of the past, Korean authorities decided to progressively move towards more indirect and market-based support of the industrial sector. They also chose to change industrial objectives. The Fifth Five-Year Plan emphasised the new leading role of small and medium industries (SEa), a sector in which competition could be promoted. It organized the restructuring and streamlining (via mergers and capacity reduction) of distressed industries. A first round occurred in 1980 (heavy power generating equipment, heavy construction equipment, motor vehicles, vessel, diesel engines, and electronic exchagere). In 1984 and 1985, shipping indusries were rationalized (reduction in the nuaber of firms from 63 to 17) as well as overseas construction (5 firms merged with more robust ones or entered into management consignment). The last round occurred between 1986 and 1988: amongst the 78 corporations involved, 21 were restructured following the same principles as those set in 198411985. Out of the 57 remaining firms, 49 were rationalized. The Korean Government also emphasized the Importance of technology as a critical factor for further strengthening the growth potential of domestic industry. 1.9 During this last period, the SHIsll position was stabilized: their V' Under Article 2 of Korea Small Business Fundamental Act, the Small and Medium scale Enterprises are classified according to the number of employees as followes Instry subgector Sall Scale Business Medium Scale Business Manufacturing, Mining, and Transportation 20 or less 21 to 300 Construction 20 or less 21 to 200 Commerce, other Services 5 or less 6 to 20 There are exceptions to these rules for some highly labor intensive or highly capital intensive iniustry branches. -5- share in total manufacturing value added (50% In 1963) was stabilized at 392 in 1987. However, as a result of the Government9s policy of increasing the share of bank lending that goes to the 8M sector, in an effort to reverse the distortionary effects of past credit policies, SMIe access to bank and foreign loans has been made approximately equal to that of larger firms. This was achieved by requiring that each commercial bank extends at least 352 of Its loans to emall and medium firms; the requirement is 802 for local banks, 90% for regionally-based commercial banks, and 25Z for branches of foreign banks (a ratio raised to 352 if the branch of a foreign bank uses the rediscount facility of the Bank of Korea). SMs promotion by the Government has also been based upon employment considerations Inasmuch as smaller firms are more labor-intensive. However, the needs in technology upgrading are suchtV that even SM1s must progressively shift from labor-intensive to more capital-intensive activities. Rising wages to also an important factor. Therefore, SM1s are permanently faced with the necessity of Improving at the same time the skill level of their work force which has to be adequate to operate more modern and sophisticated equipments. C. Develoments in the Financial Sector 1.10 While the industrial sector has been the major engine of growth, the financial sector has been the main Government policy instrument to monitor, control and orient industrial sector developments. Sice the beginning of the 1970s, development of the financial sector was character2zed by a few but relevant features which deeply shaped the structure of the sector until the mid-1980s: (a) The Government made continuous efforts to reduce the scope and influence of the curb market. In 1972, with the promulgation of the Presidential Emergency Decree, the Government decided to introduce (or Institutionalize) two kinds of non-bank financial institutions "in order to induce unorganized curb market funds into the organized financial market. Investment and Finance Companies were established to engage in short-term dealings in paper issued by business firms. Mutual Savings and Finance Companies were introduced to specialize in receiving installment savings and extending small loans repayable in installmentso . (b) The banking system (commercial and development banks), was operating under the supervision of the Bank of Korea (Bo). It was also directly controlled by the Government. Since at least 1961, the ' They result from different factorst (i) the increased reluctance of advanced countries to transfer technology, (1i) the still low (by comparison with advanced countries) ratio of R & D expenditures to GNPs 1.9Z In 1988 (although this ratio tripled since 1980), and (iii) the fact that the market segments on which Korea intends to compete internationally with countries like Japan are characterized by items with a strong content of high and advanced technology. V The Bank of Koreas Financial System in Korea, Seoul, The Bank of Korea Edit., New edition, December 1990, p.4. * 6 - Government held the largest share of voting rights In nationvide commercial banks which enabled it to "exert comprehensive control over these Institutions, ranging from the appointment of senior officers to the issuance of detailed instructions on business opera- tions"t. This situation was accepted by all the participants for at least two reasonss (1) a powerful tool to manago the economic system was then available to the Government, and (Ui) potentially harmful competition was avoided in the nationwide commercial banking system: Government-regulated interest rates stabilized Individual banks' market share at a low real cost of funds. (c) The Government created in 1974 the National Investment Fund (NIP). From the onset, the NIY was conceived as the government's major financial tool to support its El policy. The volume of funds lent by the I has expanded at an average rate of above 30 per annum from its creation to 1985. In 1985, the outstanding amount of funds lent by the NIF peaked at 2,905 billion Wons. Because these funds were channelled through 1DB, Exi Bank of Korea and other banking Institutions (including nationwide commercial banks), the share of policy loansV in domestic credit steadily increased to about 50% in the early 1980s. 1.11 The XCI drive period left Korea at the beginning of the 1980s with a highly dirigiste financial system. Institutional controls over the whole financial system were (and still are) available to the Government. The Government had, frs, a predominant position within the Bank of Korea's Monetary Board, the supreme policy-making organ of the central bank. Second, the Government was exerting direct control and supervision over all non-bank financial institutions, plus direct controls over publicly-owned nationwide banks. Third , direct monetary and financial control instruments were the ones to be used (and are still used) by the policy-makers. Through the Monetary Board, the Government can set ceilings on the deposit and lending rates of banking institutions, limit the volume of bank credit, administer the Monetary Stabilization Account (for Central Bank open market operations) and draw up broad guidelines on the efficient allocation of bank funds"'. Of course, the above list must be complemented by the existence of more traditional Instruments of monetary policys rediscount rates, open market instruments, reserve requirement ratios. To summarize, the concen* ;ation of economic power in the industrial sector was paralleled by a concentration of power in the financial system. 1.12 The new strategy designed in the early 1980., which relied more on at Ibid., p.27. Vi Such loans may be defined as loans with Government funds plus loans with NIP funds plus a fraction of loans with banking funds which are extended to earmarxed sectors at preferential or non-preferential rates Mn loans extended to unearmarked activities at preferential rates under Government's criteria and guidelines. I Financial system in Korea, op.cit., p.17. -7- market forces and competition had to materialize within the financial sector as well. The Government decided first to privatize the major nationide comercial banks in its portfolio. During 1981-1983, 1anl Bank, Korea First Bank and Bank of Seoul, and Cho Rung Bank were privatized. During the same period two new private banks were authorized in order to viden the competitiont Shinhan Bank and roAAm Bank. New regulations were introduced to guarantee the autonomy of nationwide commercial banks. The takwover and control of private nationwide commercial banks by single private (or public) shareholders was made almost impossible by limiting the ownership of a single shareholder to 8 of total shares of the bank. However, this move was only a limited one. Moreover, it was discontinued until the end of the decade. Despite privatization, the government retained control over the banking system and interest rates. New measures adopted In 1984 made just minor and technical adjustments. Consequently, with a persistenc control over interest rates, it was quite easy to abandon credit ceilings in January 1982. As Korean authorities explain, it was efficiently replaced by "moral sussion"'. 1.13 'Whereas, during most of the 1980s, the banking system remained internally far from being effectively liberalized and far from operating close to genuine internal competitive conditions, externally the situation vas quite different. In 1982, entry barriers were substantially lowered for non-bank financial institutions. The amount of operations of these institutions started to increase substantially. In parallel, new financial instruments and services were progressively introduced, resulting in #a realignment of business boundaries between different kinds of financial institutions"M'. Trust business and negotiable certificate of deposits (CDe) opened new areas of activity for commercial banks, while Cash Management Accounts (CMAs) and Comercial Paper (CP) permitted Investment and Finance Companies and Merchant Banking Corporations to operate on products close substitutes to those traditionally offered by comercial banks". If some kind of competition developed during the 1980s, it was not within the banking system as such, but mainly between the commercial banks and the non-bank financial intermediaries. 1.14 It was not until the very end of the 1980s that the Korean Government really attempted to liberalize the financial sector. Firs, the scope for financial intermediation was widened with the authorization given to open three new nationwide commercial banks and the changed status of Korea Exchange Bank from a specialized bank to a nationwide commercial bank. Local banks were also Ui Bank staff uses the term "window guidance" rather than *moral suasion" i Financial System in Korea, op.cit., p.5. I Investment and Finance companies, more than 32 in number in early 90., have multiplied their assets by about 7.6 times between 1983 and 1991. The share of CNAs in their balance sheet increased from 02 in 1983 to 28.8% at the end of 1991. Mutual Savings and Finance Companies (MSFCs) were about 240 in 1991 with some 100 branch offices. Total assetslliabilities of these companies Increased 8.2 times from 1983 to 1991. Assets of bank's Trust Accounts have recorded a 12-fold increase during the same period. Sourea Bank of Korea, Monthly Bulletin, various issues 1989 to 1992. -8- permitted to enlarge their coverage to Seoul and to other neighboring provinces. A new wave of non-bank financial institutions developed with (1) the establishment of 18 new domestic life insurance companies plus 4 foreign life insurance companies in Seoul, and (i) the establishment of five regi onally-based securities investment trust companies. SegV, a preliminary attempt at deregulating interest rates was undertaken at the end of 1988. During moat of the 1980s, Governmente* efforts were aimed at maintaining positive real interest rates and, in general, these were paying off. However, major distortions in the allocative role of interest rates remained unchanged. In December 1988 most of the lending rates of banks and non-bank financial institutions were liberalized (the exception being the rates related to major policy loans) I interest rates on deposits with maturities of more than two years were deregulated (interest rates on other deposits remained untouched)l and interest rates on money and capital market instruments (CDs, financial debentures and corporate bonds) were also deregulated. However, the results of this policy have been disappointing. Trends for the newly deregulated rates were rapidly upward oriented. Despite the government's attempts at widening the scope of financial intermediation, competi- tion did not take root amongst financial intermediaries. Continuing "window guidance" and cartel-like behavior still prevailed among commercial banks resulting in rigid interest rate trends, unresponsive to market conditions. Therefore, the only alternative open to the Government wast (i) in the short term, to implicitly accept this situation, and (ii) in the medium term, to set up a new plan aimed at deregulating, step by step, all interest rates. This was done in August 1991 with the announcement of a new four-phase interest deregulation schedule, in coordination with the international opening up of the capital market. *9- II. EgggMs THE INDUSTRIAL FINANCE PROJECT (LOAN # 2309-RO) A. BACKGROUND intradmctio 2.1 This loan is the ninth of a series starting in 1968 (with Loan # 0529-ELB) using the Korean Long Term Credit Bank (ILB) as an intermediary to finance Korea'* industrtal sector. It Is also the fifth of a series starting in 1975 (with Loan # 1095-1DB) using the Korean Development Bank (KDB) to finance the same sector. The project was identified in July 1961. The preparation and pro-appraisal work took place between this date and May 1982. A field appraisal mission visited Korea in November 1982. Board presentation and approval took place on June 9, 1983. The loan amounted to US$ 255 million. The Loan Agreement was signed on June 29, 1983, between the Republic of Korea and the Bank, for the same amount at the standard variable interest rate, with a maturity extending until July 15, 1998. The loan was sub-divided in three partes Part A, relating to KDB's participation in the overall project, amounted to US$ 130 million, and was subject to the signing of a Project Agreement between the Bank and EDB; Part B, relating to LB's participation, amounted to US$ 120 million, and was also subject to the signing of a Project Agreementl Part C was a technical assistance component of US$ 5 million, coordinated and supervised by the Korean Banking Institute (II). The loan became effective on September 14, 1983. The date of final disbursement was March 16, 1988 and the closing date was December 31, 1988. At closing date an amount of US$ 2.31 million remained undisbursed and was canceled. Five loan supervision missions were organized between March, 1983 and March 1988. A Project Completion Report (PCR) was written on April 30, 1992. It was prepared by the Industry and Energy Operations Division, Country ')epartment II, Asia Region (AS218) which was responsible for drafting the Preface, Evaluation Summary, Parts I and III. Part II of the PCR was the responsibility of the borrowers. Proiect Obiectives 2.2 The project was intended to reflect the Bank's new approach to industrial lending in Korea. Three major objectives were defined: (a) to support the Government's financial sector policy reform objectives, particularly those to be implemented over a two-year period 1983-1985; (b) to finance priority industrial investments through a credit component financing the foreign exchange requirements of KDB and LB in an amount of US$ 130 million and US$ 120 million respectively; and (c) to strengthen the financial system through a technical assistance component of US$ 5 million, of which US$ 2.5 million would finance an overseas program for financial supervisory agencies and of selected financial institutions, and another US$ 2.5 million would help computerization of financial transactions. * 10 - 2.3 These objectives relied on specific commitments from the major Project Entities. First Korea's Minister of Finance issued a Letter of Development Policy for the Financial Sector'. In this Letter, the Government expressed its willingness to progressively move towards a market determined system of interest rates but without precise commitment on timing. The Government listed a number of obstacles to a genuine liberalizations volatility of international Interest rates, heavy indebtedness of the corporate sector, the high level of secondary market yields on bonds and debentures, and the necessity of tightly controlling inflationary expectations. The Government considered interim measures such ass (I) a change in the level of administered rates of long-term depositsl and (ii) the introduction of new longer-term savings instruments by comercial banks. It also expressed its willingness to further liberalize the commercial banks by authorizing them to undertake new activities, revising the role of specialized banks, encouraging further new entries and licensing new nonbank financial intermediaries. The Government was considering a revision of bank supervision focusing on an ex post review of performance. The Government would reduce the proportion of directed credit in total domestic credit, especially the scope and level of the National Investment Fund (NIP) program, and to eltiinate interest rate subsidies. In addition, the Government would consider meac-ires aimed at improving the profitability of the corporate sector and reducing their indebtedness. 2.4 Second, IDB was committed to achieve specific targets described in an Outline of Development Strategy for 1983-1985-' in the area of (i) financial services, including internationalization of its banking operations; (ii) resource mobilization through issuing commercial bonds, and borrowing from foreign commercial markets; (iii) research and inputs into Government policy formation; (iv) staff training; and (iv) developing the computerization of its banking operations. In addition, EDB would consult the Bank prior to any major institutional change, and amend its Development Strategy Statement to "include the objective that its future profitability, as measured by net return on average equity, should be sufficient to maintain the value of its equity in real terms"!,. 14-' This document is annexed to: the World Bank, Staff Appraisal Report, Industrial Finance Project, Washington, May 20, 1983, Report No. 4435-KO, 149 p. We shall, from now, on refer to these documents as t SAR-IFP for the Report, and LDP for the Letter. The LDP is also annexed to the "Report and Recommendation of the President of the IBRD to the Executive Directors..." dated May, 20, 1983. We shall refer to this document as RRP-IPP. I This document is annexed in the SAR-IP, op.cit., p.104. From now on, we shall refer to this document as: ZDB-OBS. It follows a policy statement also drafted by KDB (in SAR-IFP, p.100). M' Cf. 1RP-IPP, op.cit., p.17, para. 40 and para. 42. - 11 - 2.5 Third* RLD also drafted a Development Strategy for 1983-1984U, Areas covered in this document were related to: (1) expansion of its business scope; (i) resource mobilization efforts through the issuance of debentures, inducing deposits, and tapping on foreign markets; (iii) development of integrated financial servicess (1v) ELB's branch networki (v) organizational development through a Business Promotion Center; (vi) enhancing its computerizationg and (vii) improving its image of a private development bank. Concevt. Desian and Rationale 2.6 The project was conceived as part of the Bank's broader industrial lending strategy111. It focused on financial sector policies, in line with the new stance the Government took up in the early 1980s in this area. When the Bank identified and appraised the project, the Korean Government had already taken preliminary measures to liberalize the financial sector: privatization of publicly-owned banks, authorization of opening one new private bank, and reduction of entry barriers for non-bank financial intermediaries (1982). The Government was likely to continue such a policy, although decisions concerning interest rates were still postponed. In the meantime, the Government was in the process of restructuring Korea's industry after the RCI driven. Several industrial subsectors were suffering from excess capacity. Extensive project appraisal capabilities were needed in government agencies for adequate project selection. A greater emphasis was to be put on higher quality and technologically advanced products. Therefore, the Bank's project was conceived as an effective support of the Korean Government's policy for the industrial sector and the financial sector. However, the Bank's project concept was far more focussed on the financial sector than on the industrial sector. In addition, the project was conceived to be flexible enough to leave to the Korean Government room to manoeuvre, without imposing constraints on the possible new structure of the financial system, or a time schedule. The project was based upon a common view shared by the Korean Government and the Bank on the direction to be followed. It was understood that the Government would have a complete tactical and strategic freedom concerning the adequate means and dates. The Bank and the Government would only exchange views from time to time on the progress achieved in carrying out the programs of financial sector reform. 2.7 A loan of US$ 255 million with a maturity of 15 years including a grace period of 3 years was made available to the Government. The loan proceeds were onlent to participating DFIs under Subsidiary Loan Agreements, i.e. US$ 130 WV This document is annexed in the SAR-IPP, op.cit., p.141. From now on, we shall refer to this document as: LB-DS. It follows a Statement of Investment and Operational Policies also drafted by KLB (in SAR-IFP, p.137). JA At Board presentation date, another Industrial Finance project was already planned. It was "likely to be broader in its scope as it might include the participation of commercial banks following their privatization and the strengthening of their staff capabilities in term lending". Cf. SAR-IFP, op.cit., p.22, para 3.04. ' Cf. supra, para 1.7. * 12 - million to 1DB and US$ 120 million to UB and a total of US$ S million to participating financial Institutions in the training program. 2.8 EDB and RLD would, in turn, onlend the proceeds of the credit component at a variable interest rate of 2Z above the effective borrowing cost'. RDB and MB would select investment projects to be financed, amongst medium and larger scale enterprises, with a sound financial structure and an acceptable degree of indebtednessUl. Individual subloans would be constrained by a ceiling of US$ 10 million and a "free limit" on subloansU' was set at US$ 5 million. Standard procurement procedures of IDB and KLB would be the basis of the procurement under the credit component. In addition: (a) XDB would (1) maintain a 10l long-term debtlequity ratio, (ii) keep an average effective interest spread of at least 2% when onlending the proceeds of foreign currency resources, (iii) have a minimum return on equity equal to the rate of inflation, and (iv) report quarterly to the Bank progress made towards reaching its borrowing targets in the area of foreign commercial resources; and (b) KLB would (i) maintain a 12:1 long-term debt equity ratio, (ii) submit to the Bank, on a quarterly basis, progress reports concerning its cofinancing with foreign commercial resources, and (iii) require its auditors to express an opinion as to the adequacy of provisions for bad debts. 2.9 For the technical assistance component, the Goverment would: (a) Sign an agreement with the Korean Banking Institute (EBI) setting out its responsibilities in executing the training component. In addition, the specifies of TBI's annual training program would be submitted in advance to the Bank for its review. (b) Enter into standard subsidiary loan agreements, acceptable to the Bank, with each participating financial institution. Loans to these institutions would be made at the same interest rate as applicable to the Bank loan. Participating institutions would bear the foreign exchange risk. Individual contracts for training exceeding US$ 75,000 would be subject to the Bank's prior approval, and all training contracts would be subject to ex-post review. The Bank would also review and approve in advance, on a regular annual basis, the content, organization and costs of the training program. U1 The Bank's standard variable interest rate, plus 21 in which were included the 0.251 front-end fee paid by the Government and an administrative fee of 0.05% imposed by the Government; based on the current Bank lending rate, the final lending rate to subborrowers would be about 131. L' A maximum debtlequity ratio for eligible subborrowers was set at 4.5:1. Pt Including other outstanding balances financed from prior Bank loans. - 13 - (c) Sign a revised contract with the Korea Advanced Institute of Science and Technology (KAIST). Its subsidiary Software Development Center (SDC) had to design the data processing system for the computerization program and define the activities and costs covered by the computerization component. B. PROGRESS IN MEETING STATED OBJECTIVES (1) Attainment of Basic Obectives The Cledit Component 2.10 Overall, the credit component was satisfactorily utilized. XDB financed 54 subprojects amounting to a total of US$ 128.4 million of IBRD funds and KLB financed 89 subprojects amounting to a total of US$ 119.3 million of IBRD funds. A number of projects generated substantial export earnings and employment generationu. When calculations were made, KDB and ILB subprojects showed satisfactory FRRs and ERRa1'. 2.11 From the outset, difficulties appeared when funds had to be disbursed. 671 of the projected US$ 33.3 million were actually disbursed in 1984. A slow initial disbursement profile may be considered as normal. However, subsequent economic factors cumulated to the point that disbursement was jeopardized by the end of 1985: (i) a slowdown in the demand for long-term loans started to materialize in 1984 and continued until the beginning of 1986, (i) the BoK's Won export facility provided cheaper foreign currency resources, and (iii) the drop in interest rates prevailing in the international capital markets made the Bank funds less competitive. Although the BoE's won export facility was discontinued at the end of 1986 and the demand for long-term loans was restored to a satisfactory level, several changes were made, at various stages of project implementation, to support regular utilization of the credit component: (i) The interest rate spreads on Bank-financed subloans were reduceds (ii) the maximum subloan size was increasedi (iii) the debtlequity limitation was revised upward; (iv) the financing of up to 1001 of local costs was exceptionally permitted; and (v) a revolving fund was arranged as a means to move funds quickly. Therefore, W' Cf. PCR-IFP, Annex Tables 4.3 and 4.4, pages 34-35. It However, ERRs and FRRs in practice have their own limitations and, in this particular case, the quality of the calculations is questionable. ]D] often subcontracted feasibility studies to its subsidiary, the Korean Management and Credit rating Corporation (RHCC). Even though KNCC's staff is doing its best, the Evaluation mission interview suggests that the shadow pricing method is not fully understood by it. It is also to be noted that ELB wrongly displayed ex Post FRRs and ERRs in the tables provided to the Bank: only projected FRRs and ERRs were indeed calculated by RLB. Discussions with RLB officials suggest that the institution is far from being convinced about the usefulness of the calculations. The Bank maintains that ERR calculations are particularly useful for DFIs in cases where the project faces major price distortions (World Bank, Operational Directive 8.30 para. 68). - 14 - the attainment of the credit-related objectives was achieved at the price of a compromise solution. The Policy Comonent 2.12 Decontrol of Interest Rates. During the reviewed period, interest rates remained largely administered, in spite of an economic environment favorable to relax controls over interest rates. The inflation rate stayed at about 2.72 p.a. on average and interest rates remained significantly positive in real terms. International interest rates were on a declining trend and therefore, pressures on the Korean market rates eased. At the beginning of 1984, the preferential rates on policy loans by commercial banks were abolished. A band system of rates under which banks were allowed to charge different rates based on borrowers creditworthiness was introduced. Ceilings on inter-bank call rates and issuing rates of unguaranteed corporate bonds were lifted in 1984. In 1986, the authorities reduced the maximum lending rate from 13.5Z to 122 and the lending rate band from 3.5% to 22. Also, new financial Instruments (Cds, CHAs) introduced some diversity in the range of financial yields available. Nevertheless these changes had a very limited impact. 2.13 Lberaligation of Commercial Banks. The main decisions concerned the foreign bank branches. In April 1984, the Government placed them on an equal footing with domestic banks by lifting discriminatory restrictions on their business activities. They were allowed to join the Korea Federation of Banks for the purpose of exchanging business information with domestic banks. They were permitted to make use of the rediscount facilities at the Bank of Korea for export financing and for general commercial bills. They were allowed to enter into the business of money in trust and of negotiable Cds. In November 1985, Citibank and Chase Manhattan Bank could join the Clearing House as special members. 2.14 Camercial banking business has been progressively widened in different ways. The trust business, formerly limited to the Bank of Seoul was opened to local banks in May 1983, and in February 1984 it was opened to nationwide camercial banks. Factoring business and negotiable Cds business were introduced in 1983 and 1984. The Cde business was opened to nationwide commercial banks, local banks and Korea Exchange Bank as of June 1984, and further opened to other specialized banks (1985) and foreign banks (1986). La March 1985, banks were also permitted to handle household money in trust'. Company money in trust was further introduced in July. Preferential savings deposits and household preferential installment savings deposits, introduced in April 1985, were opened to all deposit money banks which were therefore able to offer a three years contract term with a maxImum amount of W 10 million and with an interest rate of 132 p.a. I' Dividends are determined by actual results of funds operations, in contrast to the fixed rates that characterize the other trust business. - 15 - 2.15 SUjMervieon of FinaMial Intermediares. This task is accomplished by the Office of Bank Supervision (OBS) of the Bank of Korea, subject to the instructions of the Monetary Board. It directly supervises the business of commercial banks and is delegated by MOP to supervise specialized banks and non-bank financial institutions. The supervision system remained basically the same during the 1980s. More precisely, with the substantial expansion of the NBFle' business, the staff in charge of this supervision is still small (40 persons only) and the supervision requirements are far from being fulfilled. 2.16 Directed Credit,. The related issue is the volume and proportion of policy lending in the economy. Policy lending to achieved through several directed credit programs'. The Government was committed to gradually reduce the scope and volume of the NIP. This fund was established in 1974 and had expanded rapidly up to 1985. The NIF resources consist of (i) compulsory deposits from banking institutions and from insurance companies and (ii) transfers from the various government budgetary accounts. While the annual flow of funds channeled throuAh the NIP has steadily decreased since 1985 and the outstanding balance was reduced to about W 2,000 billion at the end of 1991, the volume of nolicv loans and its share in total domestic credit increased again after 1985 reaching W 44,850 billion in 1990'. Therefore, the initial effort to limit the directed credit was discontinued after 1985. Interest rates differentials between policy loans and general loans were reduced. Overall, however, the interest rates subsidies remained basically unchanged during the reviewed period. 2.17 indebtedness and Profitability of the Corporate Sector. The Government took several measures to induce enterpri es to make more use of the securities market. Concerning the stock market, it introduced, in July 1983, less stringent conditions to issue shares at market value. In April 1987, it promoted the establishment of an over-the-counter stock market for unlisted stocks in order to provide a market for SME and venture businesses not eligible for listing on the Korea Stock Exchange. New regulations were set up, in November 1987, concerning insider trading and disclosure in order to provide better investor protection and an improved transparency of the market. In parallel, the Government relaxed constraints governing participation in the Employer Securities Savings Scheme, established investment funds exclusively for pension funds and set up appropriate rules to facilitate such investments. It also tried to open more the market to international investorse'. Concerning the bond market, the Government relaxed the terms of non-guarantee corporate bonds, developed the compound rate bonds, diversified the corporate bonds. The Government also permitted domestic firms to issue convertible bonds to foreigners in 1985, and ' Direct Government funding, National Investment Fund (NIP), Credits to KDB, KEximBank,and RLB, Foreign Currency loans, Foreign Trade financing, Loans for agriculture and fisheries, Housing loans. AZ Statements in this paragraph are based on the following sources: Tables provided to the mission by the Xor; Financial System in Korea, op.cit., p.69; Korea, CEM, the World Bank, Report No. 10733-KO, p.45. -r The Korea Fund, a closed-end international investment vehicle was established in May 1984; the Korea-Europe Fund was set up in March 1987. - 16 - bonds with warrants In 1987. Because most of the measures have been introduced towards the end of the review period, their effects cannot be expected to imediately materialize within the period. 2.18 Based on Tables 1 and 2 of Annex 1, Figures 1 and 2 describe the trends characterizing the structure of Korean corporate and quasi-corporate enterprises during 1982-1991. Figure 1 relates this structure to the overall amount of Korean financial asseteIliabilitiesL". It shows a steady decline of total enterprises' indebtedness, specially over the 1983-1988 period with an acceleration in 1988. The decline is due to the progressive reduction in debts related to the international activity of Korean Enterprises and to the reduction of Government Loans. Debts with financial institutions remained approximately stable during 1983-1987 and were substantially reduced in relative weight in 1988 only. Meanwhile, the share of Stocks and other Equities which slightly declined during 1983-1985, increased also slightly to 7.17? in 1987-1988. Figure 2 relates the structure of indebtedness to total liabilities of the sector. It confirms the substantial reduction of foreign debts and trade credits during 1983-1989. Meanwhile, debts related to loans by financial institutions increased slightly from 32% to 362. The increase was also more important for long term securities than for stocks and other equities. 2.19 The profitability of Korean enterprises is difficult to assess on a global basis. However, data are available to appreciate the trends characterizing this profitability for the manufacturing sector2l, as well as the trends characterizing the indebtedness of this sector. Based on Table 3 of Annex 1, Figures 3 and 4 present the major related trends. Figure 3 shows that, for the manufacturing sector, 1985 was a turning point for borrowings: after two years of reduction, the share of total borrowings in total assets suddenly returned to its 46% level of 1982. This share further declined during 1985-1989. The share of stockholders equity to total assets increased slightly but steadily and further accelerated during 1988 and 1989. The subsequent years recorded worse performances (see Table 4). 2.20 It is difficult to attribute to specific government decisions the time profile of these ratios. Instead, the exports boom that characterized Korea during 1986-1988L" may be an explanation for the improved economic situation of many Korean enterprises. The additional foreign exchange earnings helped enterprises to substantially reduce foreign indebtedness and the use of trade credits to finance international transactions. Moreover, Korean enterprises took the opportunity to modify the structure of their liabilities through an increased reliance on stocks and long term securities. W The statistical sources ares The Bank of Korea, National Accounts, 1990, Table 19, Stocks of Financial Assets and Liabilities of the Detailed Subsectors, 1982 (p.432) to 1988 (p.459); National accounts, 1998 to 1991. at Basic statistical sources are from: The Bank of Korea, Financial Statement for 1992, Seoul, 1992, Major Business Indicators by Industry, pp.63-75. 8' Cf. supra, para 1.2. 一17- 鬱〕必〔 ·鶯｝：恤！ r．神，,’戶頗“，抑，開戶｀t．徑蛭馴一 - Tle Jechuical Agsis&Mage Cowgn= 2.21 The objectives of the two technical assistance components were satisfactorily achieved. XUS&, KS1 managed the training program and organized the training abroad of 431 Korean staff belonging to 21 financial institutions and to the Ministry of Finance. 542 of the trainees were sent to the USA, 2S2 were sent to the Philippines, 3 .5% went to Europe. The remaining Vero trained ..At Seoul. Out of the US$ 2.5 million allocated to training obroadv US$ 2 million were sublent to participating institutions. The remaining US$ 0.5 million was administered directly by MoF for the training of the staf f of supervisory agencies4l. Second, the Korea Advanced Institute of Science and Technology (RAIST) effectively designed, tested and developed a computer data processing system aimed at enabling the Tax Administration to levy a composite f inancial income tax. According to Bolls officials* the system, was transferred to the Office of National Tax Administration in September 1984. It handles financial income datal produces reference data for policy-uAkers, and helps policy-makers to analyze the effects of the tax an income redistribution. The InstituJUM Building Cgoga2a 2.22 ZDB vas able to achieve its major objectives In the areas of financial servicess resources mobilizationUl and staff training. However$ in terms of profitabilityt its performances have been disappointingt its not incomet start#g from about W 20 billion in 1983s remained at about the same level in 1984211, rose to about V 30 billion in 1985 andl thereafter, dramatically dropped to W 12.9 billion 1987. Were it not for exceptional capital gains realized an the sale of marketable securities and investments (W 205 million)l the not income would have been strongly negative in 1988. The situation would have required the mobilization of KDB's reserves and the implementation by the Government of its legal obligations to "replenish any deficit that srise* if KDB's legal reserve is insufficient to cover any of its annual not losses". Non-interest income have a very important weight in set income generation Mo . 131 Specifically, 77 staff from the Mal banefitted from the training program and a few of them have um a position of Director or Deputy Director in significant areas -related to Finance. X" During 1983-1985* it raised domestically about W 1,468 billion through the issuance of Industrial Finance Debentures, and internationally,, US$ 500 million via the issuance of International Finance Debentureaq plus approximately US$ equivalent 2,400 million via commercial banks borrowings. P1 After correction due to an exceptional capital gain resulting from the sale of its headquarters in Seoul. R, Non-interest income equals guarantee commission and "other income". On averagev the annual projected l'other income" of 1KDB is very stable and amounts to W 9,193 million over the 1983-1988 period. In comparison, the actual "other income" was 2.3 times (1983) 9 3.5 time (1984) # 6.2 times (1985) 9 3.9 times - 19 - Overall, 1DB's objectives of profitability were attained (see Table 1). Nevertheless, it would be difficult to prove that 1DB has a real net earning capability based upon its borrowing and lending activitiesAl. Uble_Is IDB's NET WORTH IN REAL TERMS (W billion) 19 & 19IM 9.. 12986 1991 199.8 Nominal 832.6 870.2 906.8 926.0 1049.1 1106.8 CPI (1983-100) 100.0 102.3 104.8 107.6 110.9 118.8 Real 832.6 850.6 865.3 860.6 946.0 931.6 Sources Based on data provided by 1DB. DB's interest rates spread remained constrained at inadequate values during the reviewed periodUl. As a result of this lack of real profitability, it has been extremely difficult for 1DR to systematically comply with the 10:1 debtlequity ratio agreed with the Bank8l. 2.23 Besides its own objectives outlined in its "Strategic Plan", RL8 agreed with the Bank on objectives concerning its resources and their allocation. It was agreed that "progress made in reaching these borrowing targets will be (1986), 2.3 times (1987), 10 times (1988) the average projected amount. Us Just as an exercise, after corrections aimed at eliminating the influence of exceptional (capital gains) incomes or of incomes non related to the genuine banking activity of 1DB ("other income"), the time profile of 1DB's net income would be (in billion won): 1983 1984 1985 1986 1987 1988 Net Adjusted 7.02 -3.75 -17.63 -16.62 1.04 -138.27 income ' 1DB estimates its net spread at 0.9% in 1985 and 0.72 in 1986 and 1987. Is has a 0.5% spread on its government borrowings and a negative spread on its Industrial Finance Debentures. In addition to that the covenanted minimum spreads on Bank-financed subloans was reduced from 22 to 1 in 1987. Mi From 9.99:1 in 1985, it rose to 11.45:1 in 1986. Further improvements of the ratio were achieved only through makeshifts: a capital increase in 1987 that included a transfer to 1DB of some Government-owned equity stock was just enough to maintain the ratio at 9.42:1; in 1988 a reduction in the volume of outstanding guarantees in domestic currencies led to a ratio of 8.53:1. * 20 - monitored on a quarterly baste as part of EL's regular reporting requirements"I. The borrowing targets were set, for the 1983-1987 period, at about V 2,300 billion (US$ 3.1 billion) of which 67.5% (about W 1,550 billion) would be in domestic currency and 32.5 (about W 747.5 billion or US$ 1 billion) in foreign currency. In addition, during 1983 (4th quarter)-1985, ELS would commit US$ 415 million In foreign currency loans. Figures provided by KLB do not suggest that it was able to reach these targets. (2) Extent of Adherence to Loan Conditione 2.24 The Government had to comply with (1) technical conditions (oulending proceeds of part Cl of the loan to participating financial institutions carrying out training); and (it) ex ante conditions of avyaroval and Ax lot conditions of snpernin (furnishing to the Bank training contracts costing US$ 75,000 or more for prior approval, maintaining separate accounts reflecting all expenditures on which withdrawals from loan account on the basis of SOs for each fiscal year). The Government complied with these conditions. The Government also agreed to (i) "adhere to the execution" of a program described in a "Letter of Development Policy for the financial setor* , and (ii) to exchange views on the progress achieved in financial sector reform. The latter condition was satisfactorily met by the Government. However, progress achieved in reforming the financial sector remained very limited during the reviewed period. Perhaps, it is because no genuine policy conditions were attached to the loan. Instead, the Government was left with maximum freedom to maneuver in terms of objectives setting as well as in terms of policy instruments. But it remains to be known whether with specific timed policy condition, the program would have been executed. After all, the Bank had recognised "the cautious and consistent approach to liberalisation followed by the GovernmentIV. In any case, inclusion of specific and timed policy conditions could have provided some advantages. The debate on sequencing the financial policies could have been clarified. Fully agreed upon conditions would have increased the "ownership" of the program by the Government. 2.25 EDB also had to satisfy several conditions: (a) Technical and operational conditions attached to the subloans (the maximum subloan size was set at US$ 10 million equivalentl. Subborrowers had to have a maximum debtlequity ratio of 4.5:1L'). When it appeared that the loan was not disbursing as smoothly as planned, these conditions were relaxeds the maximum subloan size was 21 The World Bank, SAR-IP, op.cit., p.48, para. 4.62. St Cf. Pres 'le of Loan Agreement 2571-2 R0, part A. 1V Cf . SAR-IP, op.cit., p. 53, para. 5.06 and RRP-ITP, op.cit., p. 23, para. 59. 91 Cf. SAR-IP, op.cit., p.55, para. 5.14. L' Cf. SAR-IP, op.cit., p.55, para. 5.13. - 21 - then set at US$ 15 million equivalent-e, the maximum debtlequity ratio we raised to 5'. 1DB had to maintain a weighted average spread of at least 22 on its lending from foreign commercial borrowings, and a spread of 2% over the cost of the proceeds of Bank loan. It vas unable to comply with both conditions essentially because it had to respect Governmentts guidelines concerning its onleading rates. The Bank agreed on September 9, 1986 to revise downwards the minimum spread on subloans from Bank loan. Also, KDB had to maintain a maximum debtlequity ratio of 10:1. This ratio remained constantly close to the limit and even rose to 11.5t1 in 1986. The procedures Implemented to eventually attain a debtlequity ratio below the maximum of 10s1 suggest that (i) as shareholder, the Korean Government was not really aware of having to adequately capitalize its state-owned banks on a long-term basist; and that (ii) KDB had to progress in the area of satisfactory balance sheet management .' Finally, KDB had to avoid bearing any foreign exchange risk, and did it effectively. (b) KDB agreed to comply with conditions of supervision-' for each fiscal year. No problems have been encountered in this area. (c) Mutual information conditions were satisfactorily met by KDB which informed the Bank of any condition that could have interfered with the progress of the project, and exchanged views with the Bank on such progress. 2.26 KLB had to satisfy sets of conditions similar to those constraining KDB. It complied with all of them, except for the debt/equity ratio constraint: Pt It is the maximum to which the Bank's PCR refers (PCR-IPP, p.74), explaining further that the condition was satisfactorily met. i' Cf. PCR-IFP, p.74. It is also explained that enterprises with a 4.5:1 debt/equity ratio should have a 1.25:1 debt service ratio during the first three years of operation. This condition never appeared in the SAR-IP... 16 The Government, as a substitute to a genuine capital increase, transferred to 1DB equity-stock that it (the Government) owned in other corporations. It was just enough to maintain the ratio close to 10i1. Ut If KDB reduced, in 1988, the volume of its outstanding in risk guarantees, one may wonder why this reduction did not occur before. In addition to that, it seems that this reduction was only a formal cosmetic arrangement aimed at reaching the covenanted ratio, because, normally, such guarantees are off-balance sheet items. gi' Like maintaining procedures and records to monitor progress of the project and to reflect its own operations and f-.nancial conditions; like providing the Bank with certified copies of audited financial statements (and the auditors' reports. - 22 - the maxium ratio was set at 12:1 in the Project Agreement;i' problems arose during 1985-1987, when the ratio was well above 15:1 on average. The Bank responded by relaxing the constraint to 15:1. The subsequent strategy of ELB3' brought back the ratio to 5sa. C. OPERATIONAL AND FINANCIAL PERFORMANCE OF PROJECT ENTITIES (1) 1DB's Performance E's oerational Performance 2.27 Total actual loan approvals by XDB increased substantially during 1983-1989 and doubled in nominal volume4t. Approvals of domestic currency loans increased by 1/3 during 1984, but remained remarkably stable during 1984-1989. Approvals for equity Investments which were very small over 1983-1986, rose to W 285 billion in 1989. Approvals for the acquisition of bonds and debentures which were marginal during 1983-1988, reached 11.2Z of .:otal approvals in 1989. As a result, the structure of approvals was deeply changed by the end of the reviewed periods more approvals for loans in foreign currency, less approvals for loans in domestic currency, more approvals for equity investments. 2.28 XDB's loan portfolio has not recorded very substantial structural changes over the periods its outstanding loans were 202 working capital loans and 802 capital equipment loans from the beginning to the end of the period. Changes in the sectoral distribution of outstanding loans were marginals manufacturing industries as a whole received about 502 of total XDB's loans in 1989 as well as in 1983. However, RDB focussed more on the machinery subsector in 1989 than in 1983. Overall 1DB's portfolio may be characterised by structural stability. ! The World Bank, Project Agreement (Industrial Finance Project) between IBRD and YLl, June 1983, p.6, Section 3.02. 2t A substantial recapitalization in 1988 and almost in 1989 which more than tripled XLB' s share capital of 1984 and a substantial equity increase in 1989, led to a total equity, in 1989, 6 times more important than in 1984. Ut This progress was accomplished by leaps and differentiated depending upon the kind of loans approvals of foreign currency loans jumped from W 181 billion in 1983 to W 651 billion in 1985. They were however reduced to W 607 billion in 1986 and further stabilised at about W 850 billion during 1987-1988, before declining to W 766 billion in 1989. * 23 - KDB's Financial Performance (a) Profitabtltty 2.29 KDB's profitability io highly dependent upon two major factores (I) the degree of Interest rate administration in the economy, and (ii) the constraint inherent to its status of Public entity by which EDB has to "furnish and administer funds, in conformity with Government olicies..."11. As already noticedUl, over the reviewed period, RDB's profitability in nominal terms remained mediocre and maintained positive thanks only to exceptional sources of net income in 1984 and 1988. Net profits as a percentage of average net worth never stopped declining. Without the capital gains the percentage would have been negative in 1988. 2.30 IDB has not yet reached a state of sustainability. Due to its nature of Public entity as it is defined in the Korea Development Bank Act of 1954, it is not reasonable to expect that KDB would reach such a state, unless, of course, substantial amendments would be introduced in the KDB Act. RDB's sustainability may be quantified through to the calculation of a Subsidy Dependence Index (SDI): "The financial self-sustainability of a DFI [Development Finance Institution) is achieved when the return on equity, not of any subsidy received, equals or exceeds the opportunity cost of funds...(...).. .The SDI is a ratio that measures the percentage increase in the average on-lending interest rate required to compensate a DFI for the elimination of subsidies in a given year while keeping its return on equity equal to the approximate non-concessional borrowing cost"U1. KDB has a wide range of financial resources borrowed at below market rates and that it is constrained to onlend at Government's defined rates. Frequently the spread is inadequate and sometimes negative. The following table shows the values of XDB's SDI over the period 1985-1991: 21 Korea Development Bank Act of 1954. Wt Cf. supra, para 2.22. P' 7.9Z in 1979, 1.72 in 1984 (without the capital gainl 4.4Z including these gains), 1.32 in 1987. L1 Jacob YARON, Assessing Development Finance Institutions. A public Interest Analysis. Washington D.C., The World Bank, World Bank Discussion Papers, n*174, p.5. - 24 - Tab]& 2: SUBSIDY DEPENDENCE INDEX OF DB Zsax M1 1985 0.3374 1986 0.2896 1987 0.2918 1988 0.2856 1989 0.3279 1990 0.3611 1991 0.3863 Sources Based on data provided by RDB. These figures show that 1DB is still far from an adequate state of self-sustainability. On average, the SDI amounts to 0.3257 for the 1985-1991 period. During the same period, the average RDB's on-lending rate was 8.892; whether ZDB could have tried to reach a miniaum level of self-sustainability, it would have had to set an average onlending rate at, at least, 11.81. (b) Ouality of Loan Portfolio 2.31 Basically, IDS's loan portfolio remained sound. The percentage of the loan portfolio affected by arrears, rescheduling, and write off which was 8.6% in 1983 was reduced to 7.12 In 1987. The collection rate remained satisfactorys around 991 on average during the reviewed period. (c) Resources Mobilization and Diversification 2.32 Table 3 shows the major changes that characterized IDB's funding sources over the period 1984-1988/89. - 25 - Tble 3s DB's FUNDING SOURCES (in 2 of total amounts outstanding as of end year) Im 1988/89 (average) 1. Capital and reserves 11.0 9.5 2. Borrowing from the Government 12.5 10.7 3. Borrowing from Special Funds 23.5 12.6 4. Industrial Finance Bonds 11.0 22.5 5. Deposits 4.5 4.2 6. Foreign Currency Borrowings from BoR 1.0 33.3 7. Loans from Abroad 33.0 4.2 8. Bonds issued abroad ),S --3,0 TOTAL 100.0 100.0 Sources Based on data provided by IDB. 2.33 From the table, it can be seem that KDB's level of capitalization worsened (item 1), as noticed before. Moreover, in a preliminary move towards a more liberalized financial system, KDB has been strongly induced by the Government to rely less on borrowings from Government Funds and more on market oriented instruments (item 2). The substantial reduction in borrowings from Special Funds (item 3) was achieved through annual cuts in the amounts available through NI721. Finally, XDB has Impressively shifted its foreian currency resource base from overseas sources to a domestic source: the Bank of Korea (item 6). With the boom that characterized the Korean economy and with the accumulation of external trade surplus recorded during 1986-1988, the Bank of Korea received most of the foreign exchange positive balances. It has deposited a portion of these surplus in deposits with 1DB. Such deposits are denominated in US$, bear interest at floating rates and have maturities of one year. 1DB uses part of these deposits, in accordance with Government guidelines, to finance certain development projects. It has also taken the opportunity of this comfortable situation in terms of foreign exchange availability to severely cut down the outstanding amount of its overseas borrowings whether they were from official sources or from commercial or market sources. Factors Affectiny Performance 2.34 Factors affecting KDB's performance are mostly external factors outside the bank's direct control: (1) KDB has not been adequately capitalized but this weakness is Government's shareholder responsibility; and (it) DB's profitability is low but, in this area, XDB has to comply with Government's P' Outstanding borrowings from the NIF by XDB went down, from W 1,522 billion in 1984 to V 1,025 billion in 1989. Although the issuance of Industrial Finance Bonds Is limited by ceilings, KDB has still a wide room to maneuver for further issuances. In December 1991, it used only 43.61 of total availabilities authorized by the National Assembly. - 26 - regulations concerning its spreade. Therefore, further improvements of EDB's capital structure and of its profitability should be contemplated through negotiations with the Government, within the more general framework of the reform of Korea's financial system. (2) ELs Performance ELB's Operational Performance 2.35 RLB's operations expanded impressively during 1983-1988: the outstanding amount of all operations was multiplied by 2.7. Domestic currency loans have been the most dynamic item: total approvals recorded a 5.5 times expansion in number and their volume recorded a rate of increase of 342 p.a. As a result, domestic currency loans turned out to be the dominant item in KLB's overall operations at the end of the reviewed period. The percentage of the outstanding volume of domestic currency loans in total operations rose from about 44Z in 1983 to about 581 in 1988. Foreign currency loans displayed a contrasted trend. Their increase was steady in 1983 and 1984, but this increase was followed by a reduction and a stabilisation during 1985-1987. MB's other operations remained alacat marginal during 1983-1988 since, at the end of the period they accounted for less than 6 (on average) of overall operations. KLB's Pia4gIal Profitability 2.36 U39s profitability was satisfactory during the reviewed period (1983-1988). Its income before taxes increased from V 10.9 billion in 1983 to V 30.8 billion in 1988. A similar trend characterised the net income which more than doubled between 1983 and 1988. As a result, -.he net return on equity was maintained, on average, at about 11.5% over the period under review, without major deviations around the average. The bulk of ILB*s gross income arises from interest bearing operations. 2.37 Although the major part of ELB's activities is based on commercial operations, EB benefits from financing sources at preferential rates,4. This raises the question of VIB's self-sustainability. The following table describes the trends characterising EI's SDIt AUl Government loans, loans from earmarked public funds like NIF, Petroleum Business Fund, Industrial Development Fund. - 27 - Table 41 SUBSIDY DEPENDINCE INDEX OF LS sM AU 1985 -0.0183 1986 -0.0133 1987 -0.0009 1988 0.0806 1989 0.2621 1990 0.2112 1991 0.1606 LgMigg Based on data provided by RLB. ELB's self-sustainability has worsened over the years. The index was acceptable until 1987, but thereafter, the index became largely positive, reflecting an increased dependence upon subsidized funds. The amount of domestic currency borrowingen' which was quite negligible, in 1985 for instance, skyrocketed after 1986 and until 1991, reaching 67.82 of total KLB's borrowings. This trend is worrisome on several countst (a) it casts a special light either on the effectiveness of the Government's stance aimed at liberalizing the financial se, tort or on XLB's successful strategy almed, through this unveiled behavior, at maintaining an acceptable level of profitability; (b) because RLB is a private bank, one may wonder whether Korea banking institutions are really favorable to a liberalization of the financial sector. The substantial increase, in recent years, of KLB's SDI could very well be the evidence that Korean banks prefer a cartelized structure (c) A positive answer to the questions above could help to understand the Government9s lack of success to liberalize interest rates in December 1988: after all, it is after 1988 that XLB's reliance on subsidized funds has been the most important. (b) Quality of Loan Portfolio 2.38 EB has not provided the mission with detailed data concerning the quality of its loan portfolio for the period under review. However, data available for 1984 show that for a total loan portfolio of W 903 billion the amount of principal in arrears was 2.7 billion (0.3%). At that time, the ratio "provisions for losses/loans" was 12. Therefore, one may consider that the initial quality of ILB's portfolio was good. Nevertheless, because this ratio has increased to 1.92 in 1986-1989 and further to 22 in 1989, it is to be feared that XB's portfolio quality has somewhat deteriorated between 1983 and 198811989. A In majority Government loans or more widely, policy loans. - 28 - (c) Resources Mobilisation and Diveretfheation 2.39 Figure 5 based on Tables 4 and 5 of Annex 1 Illustrates the changes in RLB's funding sources over the period 1983-1989. FRIUSE 5 SMUOU 0,~lOeN10R Im i low lesow lown low YOM nBI has steadily increased issuance of debentures from 37.9% of its funding in 1983 to 45.1 LZIn 1989. In the meantime, It has reduced foreign currency borrowings,9 especially during 987-1989. During 1983-1987, all foreign borrowings came from banks. Laterv RLB adopted a strategy similar to that of 1DB% substitutinS foreign currency resources from abroad for foreign currency resources frc C&l. The Figure 5 also shows the increased Importance of policy loans in M,99s structure of resources. Factors Affectxnr Performanex 2.40 From the above increased reliance on policy loans as source of funds has been a 5.ajor factor of Ls mixed performance. This factor contributed to significantly positive SDIs for ILD, even to levels close to DB. For instance, rDBs SDI was 0.3279 and iLs SDI 0.2856 In 1989. The significant subsidy dependence is linked to the lack of effectiveness of the Oernment's interest rate liberalization program. (3) tIes Performance 2.41 The Bank's SA explained that "the cost of the training would be borne by the participating institutions For this purpose, the Goverriment would make loans available to these Institutions at the same interest rate as - 29 - applicable to the Bank loan"W'. The expected outcome should have been a zero net interest income recorded by KBI. Data provided by EBI (see Table 4), and reported in the Bank's PCRP1 show that, except in 1984, the training component lending operation has been interest-subsidized by the Government, since the net interest income has been negative. No comment was made on this subject in the Bank's PCR. D. FINDINGS AND ISSUES (1) Overall Assessment 2.42 For the industrial component, results appear te be good. Perhaps more attention should have been paid to the economics of resource transfer to concerned industries4l. XDB and LS report identical (or close) ex ante and ex post job creation numbers, but were not able to give a clear explanation for such coincidence. The same applies to ERRs and FRRs calculated by KLB-. 2.43 The policy component was based on a "pragmatic" and "empirical" approach9l. The Bank did not succeed in harmonizing the time horizon of the participanteft, or in sequencing of the financial policies in the program. When the PCR-IPP states that "insistence by the Bank on being kept informed in writing, as required by Bank policy, regarding planned actions in sensitive areas of the reform might have cost the Bank an unacceptably high amount of goodwillOO-', it shows the limits to an adequate monitoring of this operation. This project vas, in terms of amount lent, one of the most important Bank 20 The World Bank, SAR-IFP, op.cit., p.50, para. 4.69. Lt The World Bank, PCR-IFP, op.cit., p.72. U1 Besides historical descriptions of the industrial sector, the SAR-IFP does not contain much more than one paragraph (the para 5.03, p. 52), and the PCR-IFP about 10 lines (page 7), concerning the industrial impact of the project. 81 Cf. footnote 24 para. 2.10 for a discussion on the limits and relevance of ERR calculations. 1i Cf. PCR-IFP, op.cit., p.9. Quoted words are in para. 11.04 and 11.05. Lt The relevant period for the Government's strategy was 1982-1986 (LDP, op.cit., para 4.), whereas the strategical period for KDB was 1983-1985 (KDB-OBS, op.cit.,p.194), that of KDB was 1983-1984 (KLB-DS, op.cit.,p.141) ; the Bank based its own reasoning on DBI's projections for 1983-1986, ELBs projections for 1983-1987, and restricted the scope of the operation to the 1983-1985 period (Cf. the Table entitled "Key Aspects of Financial Sector Reform', SAR-IFP, Annex 1, Table 4, page 61). III PCR-IFP, op.cit., p.9, para 11.06. * 30 - projects in Koreas. One could have expected more precise commitments and monitoring for a loan of this size. Instead, a detailed analysis of the documents shows that remote long-term goals were detached from short- to medium-term commitments. 2,44 Only the institution building component contained precise commitments and conditione-" However, whereas formal objectives were generally attained and formal conditions were generally met, operational objectivesil fell short from expectations and basic conditions were relaxed. A typical example is debtlequity ratios. (2) Proect Identification. Appraisal and Design Issues 2.45 The need to reform the financial sector in Korea was emphasized by a report dated Nov. 26, 1980, which followed a mission undertaken a year before'. The report (i) acknowledged the dirigiste nature of the Korean financial system, (ii) admitted that, very likely, its nature was appropriate during the first stages of Korea's takeoff, but nevertheless (iii) pointed out that, in view of the increasing complexity and sophistication of the economy, several changes should be introduced over the next decade to liberalize and make the system more market-oriented. Maintaining positive real interest rates, reducing the scope of the directed credit system, replacing administered investment criteria by appraisal and managerial capabilities of financial intermediaries, were some of the major themes of the report. The Bank did not give firm indications that such a stance had the support of the Korean Governmently. Nevertheless, because Government's achievements in this area L' US$ 255 million whereas the Bank's first S.A.L. to Korea approved in December 1981 was second in sizes US$ 250 million. WI For instance, when the Minister of Finance's LDP explains that "the Government's longer term objective...(...)... is to allow market forces to determine the level and the structure of interest rates" (LDP, op.cit.,p. 62, para 4.), the Bank translates it as a "measure planned for 1983-1985" in its Table of Key Aspects of Financial Sector Reform (SAR-IFP, op.cit., p.61). L8 Cf. supra para 2.4 and 2.5 for the objectives and para 2.8 for the conditions. L Profitability in KDB's case, resources mobilization in KLB's case. B1 The World Bank: Korea, Financial Sector Report, November 26, 1980, Report n. 3288-KO, 27 pages + Statistical Annexes. ZY It was written in the reports "it is the opinion of many Koreans, and of the Mission, that at the current stage of Korean Development, this flexibility can be better ensured through financial liberalization." Korea, Financial Sector Report, op.cit., p.20, para.4.01. The basic question is: what was the Government's opinion, beyond that of "many Koreans" ? Let's simply observe that the SAR-IP (op.cit.,p.12, para 2.16) expressed that the "Government*s reaction to the Bank's recommendations was mixed". - 31 - remaaned very limited until 1981, the Bank Identified (in July 1981) the need to progrese more deliberately in this direction. 2.46 About two years elapsed before the appraisal of the project, made Io November 1982. The Board presentation took place to June 1983. In the meate the Goverment privatised four nationwide comercial banks, authorized two new nationwide commercial banks, revised the General Banking Act, simplified the regulatory framework, lowered the entry barriere for non-bank financial institutions, and replaced the credit ceiling system by indirect controls In spite of these measures, much remained to be done to effectively liberalize the financial systemul. The Bank may have had the feeling that the Goverment commitment to move In the right direction was resolute, and that the refore process was definitively under way. This explains why the SAR-IPP sticks so tightly to the Governmenta LDP, as far as the global refozaUs or issues are concernedZO. The appraisal did not much deviate from the Issue-raisiag approach formally accepted by the lorean Government and did not point outW that serious opposition could undermine the reform process. As a result, the appraisal was unable to adequately assess the likely outcome of the proposed financial sector reforms. (3) Loan Conditions Issues 2.47 irs, a condition agreed upon between the Bank and the Government was the mutual information on refore program Iaplementation. The Government did inform, ex post, the Bank on its achievements. It nevertheless remained reluctant to provide to the Bank ex ante written information on its planned strategy- . Therefore, the quality of the dialogue between the Bank and the Korean Government was probably not as good as the PCR mentions. Preliminary discussions normally lead to a consensus following compromises mutually accepted by both partieso Ex J1 e.g. substantially reduce the scope and size of directed credit, take decisive steps towards market-determined interest rates. t SAX- op.cit., pp. 12 and 13, para. 2.16 to 2.18. A' Ibid., pp. 13 to 20, para. 2.19 to 2.36. The Bank just paraphrases the Government's LDP (with very minor exceptions). M1 Like the writers of the Financial Sector Report tried to do. For Instance, they mentioned that "large business has profited from the system of directed/concessional credit" [op.cit., p.19, para. 3.18]. Obviously, this rates the question of obstacles and other opposition factors that could jeopardize, outside the governmental circles, any attempt to deeply reform the financial sector. Besides the large business' influence, that of financial Intermediaries should have deserved attentions trying to dismantle a cartellized system is obviously an aggression against the cartel members which may judge that they would be better off as long as they remain under the protective umbrella of complex Government regulations. ZY Cf.supra, para 2.45, and footnote 71. * 32 - post information alone presents the counterpart with a fait accomol. SAonq IDB had (i) to lend to clients having a debtlequity ratio lower than 4.51, (i) to limit its Batk-related lending to US$ 10 million, (iii) to maintain a 2% weighted average spread, and (tv) to maintain a maximum debtlequity ratio of 10:1. The conditions (i09(i) and (iii) were relaxed to improve the disbursement of this loan' and perhaps to avoid a bottleneck that could have questioned the justification of a follow-up lending operation. Tjlds when it became clear that the debtlequity ratio conditions concerning KDB and KLB would not be satisfied, such non compliances were either accepted as a fait accompli (in EDB's case) or adjusted to accommodate the borrower's actual financial profile (in XLB's case). (4) Proiect Supervision Issues 2.48 Technically speaking, no major issue characterized the supervision grocess of the project. According to the related Basic Data Sheet-1, 36.7 staff weeks (about 14% of total staff inputs) were devoted to supervise the project. In addition, the supervision was (i) associated with the preparation of the follow-up projectP', (iM) combined with other economic and sector work already underway under the Bank's aegis in Korea (SMI loan, SAL II), and (iii) shared with the Asian Development Bank as far as KDB and KLB were concernedil. The supervision process of the industrial component may be considered as satisfactory. (5) Impact of Bank Association 2.49 From this standpoint, one can derive mixed conclusions. There is no question that the Bank has maintained a dialogue with the Korean Government although the quality of the dialogue is questionable. The Bank has also kept a good relationship with both RDB and ELB. In this lending operation, the implementation of the Bank's Currency Pooling System (CPS) was already an issue. In their contributions to the PCR-IPP, KDB, and to some extent KLB, mentioned that the CPS was an occasion of dissent between the Bank and the final U1 Cf. PCR-IPP, op.cit., page iv, para.5, and page 6, para. 7.14. It Lets remember that a follow-up operation was already planned when this was one was presented to the Board. One may wonder whether the follow-up lending operation was justified, since it occurred so rapidly, overlapping with this lending operation, and before any relevant lesson could be derived from it. Il See, Basic Data Sheet, p.8. It is nevertheless to be observed that the quantity of staff inputs related to the "Lending Operations" was unusually high (108.7 staff weeks, or 412 of total staff weeks). Lt One may consider positively this feature (the Bank saves supervision time), or negatively (the concerned division has a vested interest in "harmonizing" both operations and in giving a rosy global picture). Ut This probably explains also why the industrial component was not extensively analyzed by the World Bank. - 33 - sub-borrowers. The point raised was that the CPS did not leave the possibility for sub-borrowers to anticipate the size and distribution of their foreign exchange exposure. The sub-borrowers could not hedge efficiently against the foreign exchange risk. Facing uncertainties on the future of the US dollar vis a via other major currencies, the sub-borrowers made massive prepayments. The relationship with the Bank was preserved formally because advance repayments were allowed in the Loan Agreement. However, increasing doubts about the CPS could have very well resulted In further requests for loan cancellations, and become the expression of a de facto suspension of association with the Bank@1 2.50 Notwithstanding these mixed judgments, the Bank vs able to transfer a substantial amount of funds to industrial enterprises and therefore to help strengthening the modernization and restructuring of Korea's fixed capital base. Through its training component, it also contributed to familiarize with, and make knowledgeable of, up-to-date financial techniques, a wide range of Korean financial institutions. It made available to the Mol an appropriate data processing system. From this angle, Bank association has had a positive impact. (6) Sustainability of Leadin goeration 2.51 From the indMs= development point of view, the operation appears to be sustainable. Imports of foreign equipment, technology, or simply know how have been embodied in domestic production factors, bringing the Korean industrial sector into a better position to increase productivity. However, on the financial sector side, the sustainability of the operation appears uncertain. Regarding financial policies, two major items in the agenda of reform remained basically unchangeds interest rates remained largely administered and directed lending increased after 1985 (parsa. 2.12, 2.16). Turning to the institutional aspects of the project, the Subsidy Dependence Index (SDI) analysis Indicates that IDB and KLB relied on Government financial subsidies (paras. 2.30, 2.37), in spite of the Government objective to reduce directed credit (para. 2.3). In addition, XDB capability to earn a not income out of its borrowing and lending activities was not strengthened (para. 2.22). These factors make the eustainability of the entire operation uncertain. (7) LessoW of Experience 2.52 Three major lessons are derivable from this Korean first industrial projects (a) The incentive role of conditionality and its important function in enforcing a minaium level of financial discipline must remain basically intact. The flexibility argument which is brought forward in the PCR-IFP2V ultimately helps justify some unwanted outcomest. See for instance the OD report on the 81 Project. M' Cf. PCR-IP, op.cit., p.9, para 11.03 and 11.05. - 34 - (b) Projects Including a policy package can hardly escape from having a tie schedule for Implementation. (c) In general, a good leading strategy for the financial sector is based on proper sequencing of operations promoting sectoral adjustment and operations supporting directly financial Intermediaries. Pursaing simultaneously policy reforms and financial intermediary lending in one operation can yield very high benefits, but it Is also a risky operation. In this case, achievements of the policy component were well below achievements of the industry component. For Instance, within the overall administered process which characterizes the Korean financial network, 3L, a private bank, has been progresetely more and more involved in the government policy based leading, whereas the ultimate objective was to progressively liberate an increasing number of financial intermediarie, from the government's financial channels. - 35 - III. KIUAs TIM SECOND INDUSTRIAL FINANCE PROJECT (LOAN No. 2571.AO) A. BACKGROUND 3.1 This loan is a follow up operation to the first Industrial Finance Project (Loan No. 2309-10). It is the tenth of a series starting in 1968 using ILB to finance the Korean industrial sector, and the sixth of a series starting in 1975 using IDB to finance the same sector. Project identification was done in March 1984. Project preparation started in June 1984 and project appraisal was based on the findings of a field mission that visited Korea in October 1984. A. project brief was written in November 1984, and the Staff Appraisal Reportil was made available, with a President's Report4l, for Board presentation and approval that took place on June 6, 1985. The loan amounted to US$ 222 million. The Loan Agreement was signed on October 8, 1985, between the Republic of Korea and the Bank, for the same amount and at the Bank's standard variable interest rate, with a maturity extending until July 15, 2000. The loan was subdivided in three parts I (i) Part A, ZDB's participation, amounting to US$ 100 million; (ii) Part B, LB's participation, amounting to US$ 120 millions (iii) Part C, the technical assistnce component, supervised and coordinated by the Korean Banking Institute (MBI), amounting to US$ 2 million?. The loan became effective on December 26, 1985. The last disbursement date was February 28, 1989, for Part A, March 13, 1989, for Part B, and April 27, 1989, for Part C. The closing date was September 30, 1990. At closing date, an amount of US$ 44.9 million was canceled. Between April 1986 and March 1988, two field supervision missions were organized. A Project Completion Reportll was written on June 29, 1992. It was prepared by the Industry and Energy Operations Division, Country Department 1, East Asia & Pacific Regional Office which was responsible for the drafting of Preface, Evaluation Summary, Parts I and III. The project entities provided Part 11 and data for Part III. V The World Bank, Staff Appraisal Report, Second Industrial Finance Projectq Washington, May 9, 1985, Report No. 5455-K0, 135 p. This document will be further referred to as: SAR-IFP2. 1 The World Bank, Report and Recommendation of the President of the IBRD on a proposed loan (US$ equivalent 222 million) to the Republic of Korea, Washington, May 13, 1985, Report No. P-4080-KO. 43 p. From now on this document will be referred to by the acronyms RRP-IFP2. Y The loan amount was subsequently increased to US$ 4 million, in parallel with a reduction from US$ 120 million to US$ 118 million of KLB's allocation. This was made in accordance with the provisions (Section 2.02) of the Loan Agreement. J The World Bank, Project Completion Report; Rovea-Second Industrial Finance Project, Washington, June 29, 1992. This document will be referred to by the acronym: PCR-IFP2. - 36 - Proiet Obiectives 3.2 The project aimed at pursuing the strategy of the first Industrial Finance Project (17I1). Therefore, the project relied on similar obiectives: (I) to support the Government's financial sector reform program to the end of 19873 (i) to support economically viable Industrial projects by providing foreign exchange funds to XDB (US$ 100 million) and to ELB (US$ 120 million) which would onlend the proceeds to industrial clients who need to purchase equipments abroad# (iII) to assist IDB and ELB to adjust to a changing financial environment; and (iv) to Improve Institutional capabilities and supervisory skills in Rorea's financial system, through a technical assistance component (US$ 2 million). 3.3 In a Financial Sector Policy Letterll, the Ministry of Finance expressed its willingness to move towards a more liberalized financial system. The Government's stance was based upon the same set of objectives as that already expressed in the LDP prepared for IPPI. Fis, decontrolling interest rates was still on the Government' s agenda. The Government would keep a low inflation rate and minimize inflationary expectations up to a point where interest rate ceilings may be easily removed. Introducing new financial instruments was an additional policy component. Sadg, the Goverment expressed the intention to further reduce directed credit operating through NIP, as well as special investment and guarantee funds. ]ird,g, comercial banks liberalization and supervision was to be deepened. Licensing new banks, expanding the business area of regional banks, increasing autonomy of bank's management, and broadening the business scope of the banks was a component of this policy. The Government considered permitting XDB and RLB to engage in a wider range of services, and separating RDB's funding and accounts as a commercial entity from those as a government's agent. Another component focused on bank's supervision to avoid liberalization degenerating to unfair market practices. The banks' capital adequacy issue was addressed by facilitating internal capital increases, the issuance of new shares and the internationalization of Korean bank's capital. Fourth, monitoring and keeping close control upon corporate indebtedness would be addressed by adequately modifying the present prime bank systemll, and introducing incentives to use appropriate debt to equity ratios, as well as services of independent credit rating agencies. In addition, disclosures measures would be improved to encourage the development of the equity market. I,gt, a new dimension was introduceds the equity market. The Government expressed its willingness to in.roduce measures that would make investment in securities more attractive: revising the Security and Exchange Law, discouraging intercompany equity and debt holdings, encouraging large enterprises and even family business to go public, helping insurance companies, foundations and pensions funds to invest more in securities. A revitalization of Korea's over-the-counter market was also expected through the introduction of a OB list* of eligible companies It This letter (from now on labelleds PSPL-1P2) is annexed to the SAR-1PP2 (op.cit., pp.39-46) and to the RRP-IP2 (op.cit., pp. 33-40). Later on in this report, we shall see that writing the final version of this letter was a quite painstaking process involving many exchanges of letters between the Bank and the Government. V Abolition of those elements that restrict competition among the banks. - 37 - subject to les rigorous requirements. Finally, internationalization of Korea's market was considered through the development of new instruments and the progressive opening of the market to foreign securities firms. 3.4 KDB listed its own objectives in a new 1985-1990 "Outline of Development Strategy"1. This document focused on (i) priority financing the restructuring of the industrial sector, financing high-tech firms, continuing its advisory role to client enterprises and pursuing its internationalizatioal (ii) issuing an increasing amount of domestic bonds, strengthening DB's deposit taking capabilities, increasing its authorized capital to W 2 trillion by 19901 (iii) achieving a rate of return on equity sufficient to maintain the level of its equity base in real terms, and attempting to increase the ratio of return on investment to 2-32 by 1990t and (iv) Improvements in staff professional capabilities, developments of computerization, improving its management system. 3.5 KLB's objectives were expressed in a 1985-1986 Development Strate"'. KLB would (i) expand and diversify its financial services, business scope and developmental role, and its integrated financial services; (ii) further strengthen its organizational structure; and (iii) support a policy of public relations saimed at further enhancing its image of a dynamic development bank. Concept, Desisn and Rationale 3.6 The project was not innovative. It retreated from initial expectations of a more ambitious project involving the participation of several commercial banksV. Following the conceptual lines inaugurated in the SAR-IPP1, the SAR-IFP2 reaffirmed its emphasis on financial sector issues, leaving the industrial issues to the smallest share-1. The financial sector policy component had the following characteristics: * irett through the means of a signed policy letter, in which the Borrower declares to adhere to the execution of a financial sector programu, the project relied upon a decisive policy component aimed at reforming the rules of the financial sector in Korea. ' KDB's Outline of a Development strategy is annexed to the SAR-IFP2, op.cit., pp.124-130. I ELB's Development Strategy 1985-1986 is annexed to the SAR-IPP2, op.cit., pp. 81-88. V' Cf. supra, para. 2.6 and footnote (18). 1' In the SAR-IFP2, only 1.5 page deals (although in very general terms) with the industrial sector. ,U1 Cf. Loan agreement 2571-2 RO, Preamble, page 1, para A. - 38 - Second, the policy component of the project did not include a number of analytical or operational items usually attached to a genuine financial sector reform programs (a) The 1P2 restricted itself to a narrow 2.5 years time horizon (1985-1987)t (b) The project remained largely disconnected from analytical macroeconomic considerationss for instance the two Bank's SALs (Loan # 2071 of 1981 and Loan # 2354 of 1983) are not referred to with sufficient detail to remind that a sectoral policy lending operation needs to develop in a consistent macroeconomic environment. (c) The Bank apparently gave up proposing a number of key liberalization measures. A detailed comparison between the final ISPL-IPP2 and the first Bank's drafts of such a letter, submitted to Hor, shows that the following measures proposed by the Bank were ultimately rubbed out: (i) institutional arrangements to monitor the financial reform process; (ii) complete removal of controls on interest rates after ceilings exceed market rates for a period of at least one yearl (iii) introduction, within the next two years, of new financial instruments to further liberalize the financial systeml (iv) other measures which aimed at solving key issuest non performing loans, foreigners' access to the Korean Stock market, double taxation of dividends, inheritance tax liability, restricted corporate borrowing; and (v) a study on subsidized investment financing. 3.7 Overall, the Rorean Government was practically left unconstrained with the task of undertaking and implementing the modalities of the financial system reform process. Specific policy measures aimed at triggering critical phases and time constraints (deadlines, time schedules, etc.) that could have been designed to expedite in an organized manner the reform process were eliminated. As a result, the project design exactly copied that of 11: a single loanIV was made available to the Government, and the loan proceeds were onlent to participating DFle under Subsidiary Loan Agreements. 3.8 XDB and ELB would onlend the proceeds of the credit component at a variable Interest rate at least 2 percent above the effective borrowing cost, It However, the RRP-1P2 tries to correct this bias by replacing the operation within its macroeconomic environment (pars 2 to 13 (pp. 1 to 4) of this document, refer to *The Economy"). Notwithstanding this effort, not much attention is paid to the likely consequences of the trends characterizing the Korean economy, consequences that could deeply affect the project's logic. IV US$ 222 million with a maturity of 15 years including a grace period of 3 years, at the Bank's standard variable interest rate. - 39 - i.e. at about 11.5Z, based upon the current Bank lending rate of 9.31. The foreign exchange risk would be carried by the final borrowers. The final borrowers would be selected by EDB and ELB emonget medium to large-scale enterprises with a sound financial structure and an acceptable degree of indebtednessIl. Individual subloans would be constrained by a ceiling of US$ 12 million, and a "free limit" on subloans was set at US$ 6 million. Standard RDB and KLB procurement procedures were found acceptable to be the basis of the procurement process related to the Bank's loan. In addition, (a) XDB would (i) maintain a max;mum 10:1 long-term debtlequity ratiol (ii) maintain a weighted average effective spread of at least 2Z on its lending operations out of foreign commercial borrowinges (it) mattain, with the assistance of the Government, an interest rate structure enabling DB to earn a reasonable yield on its equity, and (iv) furnish to the Bank, not later than six months after the end of each fiscal year, 1DB's audited annual financial statements. (b) EL would (i) maintain a maximum 15:1 long term debtlequity ratios and (ii) furnish to the Bank, not later than six month after the end of each fiscal year, its audited annual financial statements. 3.9 For the technical assistance component (training), the Government agreed to have obligations similar to those of the previous lending operational. B. PROGRSS IN METING STATZD OBJECTIVES (1) Attainment of Basic Objegives Introduction 3.10 The lack of an appropriate time schedule associated with the reform process makes it Impractical to assess the degree of perseverance of Rorean authorities to reform the financial system. Second, the absence of consistent deadlines could eventually justify, ex post, decisions taken very late in the policy process. Therefore, we will consider two "tine markers" in order to evaluate the impact of the loan related policy packages (a) end 1987 will be used as a first "time marker" because it was explicitly used as such in the BAR- IPP21i and (b) September 30, 1990 will be used as a second "time marker" because it was the closing date of the loan. IV A maximum debt/equity ratio of 4.5:1 was set for eligible sub-borrowers. J1t Cf. supra, para 2.9, (b). I SAR-IPP, op.cit., pp.47 to 49, (Table entitled: "Financial policies and Reforms During implementation of the Second Industrial Finance Project"). - 40 - The. Credit Comonet 3.11 Difficulties Impeded a smooth disbursement of the available funds. Disbursements were planned to begin in 1986. Before that time, early signals should have reached the Bank, Indicating adverse circumstances. Between Board presentation (June 1985) and the date of effectiveness (end December 1985), the Bank was necessarily informed that the SHIP Loan (f 2515-10) was under renegotiation at Korean Government request. The Bank was also aware that IFP1- related disbursements were slow. Moreover, the Bank did not question (i) whether two overlapping operations (IPP1Z' and 1P21V) could saturate the absorptive capacity of RDB or Wl3 and (ii) whether external circumstances! could endanger the implementation of the credit component. 3.12 1DB, which was still carrying a substantial amount of uncommitted funds out of the 17P1, was unable to make any disbursement during 1986. The Bank's reaction consisted in adjusting the loan conditionsW for both XDB and ELB and for both lending operations in which these banks were involvedU'. These amendments to the Loan/Project Agreements accelerated the subloan disbursements. However, as a public entity, RDB had to comply with Government's guidelines giving priority to Won denominated foreign currency loans. Even though the BoK' s WEF was discontinued after 1986, XDB's disbursements still lagged behind schedule until September 1987. At that time it vas decided to cancel US$ 30 million out of the US$ 100 million originally planned for XDB. Further cancellations concerning XDBW and to a lesser extent 7LBUt were necessary to clean up this 1Z' With a disbursement schedule planned to extend from October 1983 to March 1988. !' With a disbursement schedule planned to extend from January 1986 to February 1989. 1 Like (a) the slowdown in the demand for long-term loans which started to materialize in 1984, (b) the existence, in 1985, of the Bo's Won export facility providing funds at cheap conditions, and (c) the fact that the US$ exchange rate against other major currencies started to depreciate, after peaking in February 1985. 0t (a) amending (for the period begianing in July 1986) to I (instead of 22) above the effective borrowing cost, the onlending rate of both 1DB and KLB, (b) amending from 4.5s1 to 5.0:1 (in September 1986) the maximum debt/equity ratio of eligible subborrowers of both EDB and ELB, (c) amending from US$ 12 million to US$ 15 million the maximum subloan size for both ZDB and RLB. t i.e. for 1991 as well. i US$ 5.7 million effective December 31, 1987, US$ 2,5 million effective July 05, 1988, US$ 0.7 million effective April 27, 1989. t ELB's loan amount was reduced from US$ 120 million to US$ 118 million on January 29, 1988. As of October 31, 1990, a loan amount of US$ 6.1 million was canceled. - 41 - part of the lending operation. 3.13 Notwithetanding these difficulties9 the credit component financed 96 subprojects (instead of 150 as planned)i IDB finally need US$ 61.1 million to finance 34 subprojects and RLB used 111.9 million to finance 62 subprojects. It Is difficult to derive firm conclusions from data provided by DB and KB concerning the performance of the subprojects. LUa, the sample provided by RLB is too narrow and does not adequately report actual PfRe and iRRsli. SBS4, whereas IDB's data cover all subprojects, the criteria retained to select a few projects are questionable. For instance the Korea Nuclear Fuel Co. (Project # B- 017) of which the estimated FRR (3.92) wee well below the opportunity cost of capital. Despite such uncertainties, TDB and RLB satisfactorily transferred the funds to the final borrowers. The PoILie CoMmonent 3.14 Decontrol of interest rates. Until 1987, the Government succeeded in narrowing the gap between the corporate bond yield and the 1 year time deposit rate, and even in stabilizing the differential between the corporate bond yield and the curb market rate (cf. Figure 6). After 1987, the analysis becomes more complex. On one hand, the interest rate differential between the curb market rate and the corporate bond yield further narrowed to about 3.51 in 1990-1991. The development of non-bank financial intermediation has, indeed, been achieved at the expense of curb market activity. As a result, parallel to the narrowing of this interest rate differential, the share of non-bank financial intermediaries in the Korean financial system reached about 60Z in 1990. On the other hand, because most bank rates remained tightly regulated, it became more and more difficult for the Government to further postpone fundamental decisions aimed at liberalizing those rates. At the end of 1988, the Government took critical decisions concerningS (a) Lending rates related to non-bank finanal institutions. The objective was to further narrow the scope of the curb market. However, if this strategy was, to a certain extent, successful, it nevertheless contributed to putting a greater emphasis on the speculative demand for financial asets. (b) Most lending interest rates related to haIkv and interest rates on bank deposits with maturities of more than 2 years. Such a fragmentary deregulation generated adverse and worrying effects, all the more worrying that the macroeconomic environment was less favorable. Persisting rigidities and cartel-like behavior within the comercial banking sector resulted in a dramatic rise of interest rates. In turn, rising interest costs began to endanger both exports and investments in such a way that the authorities had to stop the liberalization process. ' Cf. supra, para 2.10, and footnote (25). A Major policy loans however were left untouched. * 42 - FIGURE 8 INTEREST 0IE DIFFERENTIA"S M. YeOs C.lon/C -+- Cop. .Mds 1Y T* DepfCo r It was Anuaut 1991 w hen the GovexrMent announced the iaplementation of a "four stop tme schedule" to deregulate interest rates (Cf. Anne% Table 12). Therefores it cannot be said that this last Governiment plan is a direct by-product of the Bank"s loan. Firstp it -was introduced well outside the relevant span of the lending operation. Second, its logoc is based on considerations that are, to a large extents new and not expressly stated in the Initial FSPL-1PP2. Thi,d# In this area, the ups and downs of the Governmens strategy clearly Indiete that it has always kept the initiative of the timing. To eamarisel, Bank's inthuence on the Korean Government policy remained wek in the area of Interest rate liberalisation. 3.15 Reduction g Directed Credit. The Governmenta policy is summarised in the following table: - 43 - ale.5: SARB OF POLICY LOANS IN THE KOREAN FINANCIAL SYSTE (in 2 of total domestic credit) 0AT BANK NON*-BANK 1980 47.4 49.1 43.9 1985 35.3 39.3 30.2 1986 33.1 40.7 24.1 1987 33.8 46.1 20.5 1988 32.3 47.5 17.3 1989 29.6 47.6 14.1 1990 28.1 47.5 12.7 Sogrcs National Statistical Office, Korean Economic Indicators, various Issues. The Government steadily reduced the weight of policy loans. However, the reduction was uneven across sectors. Whereas the Government very substantially reduced controls over the non-bank financial sector, the trend towards a siilar reduction vie-&-vis the banking sector was reversed after 1985. The UIP channel was not usedIV. Instead, the Government made more use of KDB, KIM and even RLB as conduits for the policy loans, and maintained at substantial levels the amount of policy loans designed to support specific sectors such as housing, agriculture, fisheries. In addition, the reduction of interest rate differentials between policy loans and general loans was not undertaken. As shown in Table 8 of the Annex, such a reduction is now planned to occur only during the third step (i.e. after 1994) of the new government schedule for deregulation. To summarize, whereas the nonbank financial sector largely benefitted from the Government withdrawal, the banking sector remained effectively controlled. 3.16 Commercial baaks liberalization and gnervision. After 1985, the Government has considerably slowed down liberalization of commercial banks. Practically, during 1985-1989, no decisionW has been taken that could have enhance the competition within the domestic banking sector. Apart from ILB's involvement in the credit card business, no major Innovation was introduced to broaden the business scope of these banks. Neither KDB was restructured to set up a clear distinction between its commercial activities from those as a government's agent. In late 1989 only, the Government permitted the opening of three new nationwide commercial banks and authorized the change in the status of Korea Exchange Bank from a specialized bank to a nationwide commercial bank. In at The share of NIF substantially declined between 1985 and 1990 from 5.81 to 2.31, thus achieving part of the expected objectives. However, compulsory contributions from financial institutions were not phased out by end 1985 as it was expected. U1 The decision, taken in 1987, to allow a second Seoul branch to local banks had indeed a very limited scope. - 44 - 1990 only, the Government permitted local banks to set up branches in neighboring provinces and to estabish another branch in the metropolitan area. Contrasting with this 4-year inactivity vis-&-vis the domestic banking sector, the Government took a few decisions aimed at Improving the competitive position of foreign banks: they were allowed to rediscount general commercial bills in July 1986, to handle negotiable CDs business in September 1986, to borrow funds from the BOX as of August 1988. In counterpart, as of 1986, their specific swap facilities with BoK have been progressively reduced and their guaranteed yield on swap transactions have been gradually lowered. However, due to the limited size of the foreign banking sectot 1, such decisions cannot be expected to substantially stimulate internal competition within the banking sector. To summarize, all these measures were introduced very late compared to the Bank's expectations, and it is difficult to state that the credit for them is due to the Bank project. 3.17 Because the Bank was anticipating increased competition within the banking sector, the fact that Government emphasized increased competition from outside the banking sector should be considered as a major deviation from the original program. The development of non-bank financial intermediaries has indeed received a more effective support from the Governments between 1987 and 1990, 18 life insurance companies were established and 4 additional foreign life insurance companies were allowed to open branches in Seoul. In 1989, five regionally-based securities investment trust companies were also set up. As a result, the global picture of the Korean financial system showed a deep imbalances by 1990, 631 of total assets were those of non-bank financial intermediaries and 37% were those of banks. 3.18 Monitoring adequately the financial sector raises the issue of the role of the Office of Bank Supervision (018). The system of financial intermediation supervision has not been fundamentally modified during the reviewed period. It remained institutionally fragmented' even though the OBS had a delegated power to examine non-bank financial institutions. It also remained weak in terms of available personnel to examine the non-bavksu. M1 As of June 1990, assets of foreign bank branches represented only 5.61 of total deposit money banks (DMB) assets against 51.2% for nationwide commercial banks, 10.5% for local banks and 32.71 for specialized banks. Deposits with foreign bank branches represented only 0.81 of total deposits with DNS against 44.41 for nationwide commercial banks, 12.42 for local banks and 42.41 for specialized banks. Loans and discounts of foreign bank branches represented only 4.3% of total loans and discounts of DNB against 44.6% for nationwide commercial banks, 10.3% for local banks and 40.8% for specialized banks. L01 The 088, which depends upon the Monetary Board of the Bol, is directly responsible for the supervision of commercial banks. Institutionally, the Mor has a direct control upon all other financial intermediaries, but it delegates powers to the 08 for examination purposes. LV Out of 560 people working for the 088 (as of 1992), only 40 are dealing with non-bank institutions for which the checks are less systematic than for other banking institutions. Obviously the needs are not satisfied. - 45 - Moreover, it was only in 1990 that improved liquidity ratios, profitability ratios, and adequate provisioning criteria were defined. At that time, banks ratings (AA, A, B and C) were given and publicized. Moreover. OBS has decided to introduce B1S-type capital adequacy ratios, differentiated by category of loans, by the end of 1993. To conclude, the impact of the Bank* lending operation remained minimal during the reviewed period on commercial banks liberalization and supervision. 3.19 Reduction of corporate indebtedness. This was already an objective for the IPPI. The Government intended to address again this issue through technical measures that would (i) increase the competition between banks, (ii) improve financial information concerning the debt situation of Korean corporations and (iii) induce these corporations to use more intensively equity financing. During most of the reviewed period, not much was done to foster inter- banks competition. However the overall weight of corporate indebtedness and its structure recorded substantial changes' essentially as a result of unprecedented record levels of exports after 1985. Substantial additional export revenues allowed Korean enterprises to reduce by about 261, between 1985 and 1991, their indebtedness related to trade credit and foreign borrowing. The national indebtedness of Korean enterprises, expressed as a percentage of national financial liabilities, which was still above 401 in 1985, steadily declined to about 351 in 1991 (see Annex Table 2). 3.20 Another element of change in corporate indebtedness is long-term securities financing, which seems to have increasingly met the needs of Korean enterprises, since it grew from 7.71 of total enterprises liabilities in 1985 to 141 in 1991. However, the percentage of loans from financial institutions changed only marginally: from near 361 in 1985 to about 371 in 1990-1991 (Annex Table 2). There is no evidence that measures taken by the Government and related to the Bank project during the review period may have significantly contributed to these trends. 3.21 Rauity market dealopment. During the period under review (1985-1990) an over-the-counter (OTC) stock market for unlisted stocks was established in April 1987 with the objective of providing a market for small and medium companies and venture businesses not eligible for listing on the Korea Stock Exchange. The Securities and Exchange Act was amended in November 1987. Regulations concerning insider trading and disclosure were strengthened to provide better protection to investors and improve market transparency. The following table shows major trends characterizing the securities market since the early 1980's. W All statistical figures quoted in this paragraph refer to Tables 1 and 2 in the Annex. * 46 - Table is SECURITIES MARKET TRENDS ASt 12 M2S 12. 12tt 122 1. Stock Market Number of listed companies 352 342 355 389 502 626 669 Number of Share- holders (000s) I.a. n.. 1411 n.s. 8541 19014 U.. Market capitali- zation (W billion) 2527 6570 11994 26163 64544 95476 79020 Stock trading Value (W billion) 1134 3621 9598 20497 58081 81200 53454 Composite stock price index 106.9 163.4 272.6 525.1 907.2 909.7 696.1 Jan.1980 S 100) 2. Bond Market M 1t151 98A 1991 191 199 190 Value of issued Bonds (W billion) 3963 5687 8358 17936 23428 32278 44923 - Corporate 2093 3219 2729 3190 4244 6959 11096 - Government & Public Bonds 1870 2468 5629 14746 19184 25319 33827 Bonds trading Value (W Billion) 6248 3578 3167 7238 8545 5149 3250 Sources: 1. Stock Markets IFC, Emerging Stock Markets Factbook, 1991, pp. 130-131. 2. Bond Markets The Bank of Korea, Monthly Statistical Bulletin, various issues. Until 1984-1985, the stock market remained weak. It however expanded noticeably during the second half of the 1980'*s, reflecting the boom in the economy. The number of listed companies increased by 891 between 1986 and 1990, with 669 listed companies at the end of 1990. During 1986-1989, the market capitalization expanded by about 7002. But it decreased thereafter vhen the economy started to slow down. A quick view at the composite stock price index clearly indicates that stock market activity has been mainly influenced by the general economic conditions% whereas the Index increased by 233Z during the booming years (1986- 1988) it stagnated in 1989 and recorded a marked decrease in 1990. Government decisions have influenced the market trends to a limited extent onlys in 1986, every 1 won stock issued in public offering was matched by 18.5 won issued in - 47 - offering to shareholders in 1989 the proportion fell to 13.1; therefore, the substantial increase in the number of shareholders (about 19 million people in 1989) indicates that stock market investment has become a more popular practice during the reviewed period. It is however very difficult to firmly correlate this trend with the Government's decisions aimed at making the market more transparent. Also, decisions concerning the OTC market seem to have produced only disappointing results. At end June 1990, only 52 companies were registered on this market segment, a very small number if, for instance, we account for the fact that eall and medium industries are about 64,000 In number In Korea. 3.22 Regarding the bond market, since July 1988 the coupon rates and other terms of issuance of corporate bonds are freely determined. However, Mor still sets the coupon rate, discount rate and other terms of Issuance for government and government guaranteed public bonds. The value of Issued bonds markedly expanded during the second half of the 1980s. However, the issuance of corporate bonds did not increase as much as expected for two major reasonst (i) the issuance of corporate bonds was crowded out by that of government and public bonds which reflected the Government's strategy aimed at absorbing the balance of payments surpluses through the issuance of Monetery Stabilization Bonds (MSBs)1Ul1 and (ii) the success of the stock market has diverted the investor's interest. Also, Korean companies seized the opportunity of a more buoyant stock market to issue shares. 3.23 During the reviewed period, no major new decision was taken to effectively foster, as it was initially planned, an internationalization of the Korean securities market activities. Certainly, since 1987 Korean securities companies, securities investment trust companies and Insurance companies have been allowed to make direct investments in foreign capital markets, up to a certain amount, and since 1985 domestic companies were permitted to issue convertible bonds and bonds with warrants in capital markets overseas. But it vas 1990 only when the Government authorized the establishment of "matching funds" which balance Inward and outward portfolio capital flows. Investments in the domestic securities market by foreign investors were planned to be permitted in 1992 only and to a very limited extent. The Techical-Assistance Comonent 3.24 Because the funds made available for technical assistance purposes were increased in January 1988, from US$ 2 million to US$ 4 million, this component is expected to be fully disbursed by September 1994 only. As a result, one can just make a temporary assessment. Information provided by the Government and by KBI indicate that quantitatively, the training program is progressing satisfactorily. In addition to the training opportunities supplied to the MoF that help Mo officials to learn, in developed countries, advanced financial U1 MSBs issued amounted to W 2,100 billion at end 1985 (with an outstanding balance of W 504 billion). Issues reached V 9,383 billion in 1987 (with an outstanding balance of V 8,175 billion), W 16,966 billion at end 1988 (outstanding balance of W 15,374), W 19,828 billion (outstanding balance W 17,305 billion) at end 1989, and W 20,262 billion (outstanding balance of W 15,240) at end 1990. - 48 - skills and procedures, KBI continues to finance with Bank*a funds its overseas program covering a wide range of topics', and its expert invitation program on special subjects not adequately covered by Korean nationalsl. Since 1988, KBI has substantially widened its coverage, the total numbers of participants reaching more than 36,000, of which about 32,000 participate to the correspondence education program. The Institution Ruildin Component 3,25 ED's obetives, as they were set up in its "Outline of Development strategy (1985-1990)" have been actively pursued and most of them were satisfactorily attained. (a) In addition to its statutory activities based on policy objectives designed by the Governmentl, KDB has continued to develop its advisory role to client enterprises. It has also successfully pursued its internationalisation, through the development of a "global banking network" which currently consists of 6 overseas subsidiaries, 1 overseas branch and 9 representative offices in key financial centers. Its international funding operations raised about US$ 1,300 million equivalent through the issuance of International Finance Bonds between 1985 and 1990, and this activity further accelerated in 1991 and 1992. KDB was the first Korean institution capable of issuing Yankee Bonds and MTNs on the US market. During 1985-1990, KDB also raised about US$ 1,440 million equivalent through syndicated loans, and in 1991 only, US$ 541 million equivalent. XDB has also developed international investment banking units engaged in wholesale banking activities and an International Treasury Center which is actively engaged in risk hedging activities for both Korean and foreign customers. (b) KDB's efforts in resource mobilization were almost successful in the area of (i) strengthening its deposit taking capabilitys between 1985 and 1990, total deposits with XDB annually increased by about 34.62, demand deposits increased annually by 33.42 and time and savings deposits recorded a yearly increase of 35.8%; and (ii) increasing the amount of domestic bonds issueds during the 1985-1990 period, the outstanding amount of Industrial Finance Debentures issued by IDB rose at an annual rate of 222. By contrast, KDB was unable to reach the level of W 2,000 billion of authorized capital by 1990. Vt Such as risk management, advanced management for international bankers, international banking and finance, advanced commercial lending, etc. II Such as management of trading & treasury activities for potential foreign exchange dealers, and specialized advanced seminars for those who have completed the Loan Officer Development Program. M- XDB is the Government's preferred conduit to finance the restructuring of the industrial sector, to support the development of "high-tech" enterprises. - 49 - (a) Performance indicators targeted by EDAr were not so successfully achieved. Tkale ls RDB's NET WORTH IN REAL TERMS (W billion excelt otherwise indicated) (June) YARS 1982 I2M I2M. 19 1991 1992 Nominal 906.8 926.0 1049.1 1106.8 1318.3 1375.0 1395.9 1399.8 CPI 100.0 104.5 110.2 115.2 120.0 122.7 134.1 142.9 Real 906.8 886.1 952.0 960.8 1098.6 1120.6 1040.9 979.6 S2ag ets Based on data provided by KDB Table 7 shows that the target was formally attained over the 1985-1990 period, but a marked deterioration characterized 1991-1992. Signs of a further deterioration started to appear as soon as 1990s despite an additional increase in the paid-in capital, EDB's net income fell by 78Z and KDB's net worth in real terms increased by only 2%. Afterwards, a new injection of paid-in capital was insufficient to substantially slow down the continued deterioration of XDB's net worth in 1991, when its net income still stagnated at W 12.2 billion. (d) On the management side, EDB showed satisfactory progress in the areas of staff development, improvements in its management system and development of computerization. 3.26 XLB's objectives were set up for a period of two years only (1985- 1986), and without significant quantitative targets. Nevertheless, during 1985- 1990, KLB has expanded the level and modified the structure of its resource base. Term liabilities, which amounted to about 1,271 billion von in 1985, expanded at about 24% p.a. during 1985-1990, reaching 3,628 billion won in 1990. The share of ILB's foreign currency borrowings in its term liabilities was progressively reduced from 532 in 1985 to less than 61 in 1990, due to (i) the increased availability of foreign currency depositsIZ, and (ii) ELB's successful strategy of issuance of domestic debentures. aulty capital which approximately doubled during 1985-1988 was also very substantially increased in 1989 and in 1990. KLB more than tripled the amount of its paid-in capital and recorded profits sufficient enough to steadily increase the amount of its retained earnings. Finally, KLB made significant efforts to diversify its low-cost sources of funds by focusing also on the collection of deposits. i A rate of return on equity sufficient to maintain the level of its equity base in real terms and a ratio of return on investment of about 2-32 in 1990. JJZ Resulting from the comfortable surpluses in the country's current account. - 50 - 3.27 LS also diversified its business scope and its offering of integrated financial services. While maintaining a strong position in foreign currency lending and in domestic currency leading and domestic debentures purchases, RLB recently developed a number of fee-based businesses. As a result, the revenues related to such activities which amounted in 1985 to about 6.5Z of total revenues jumped to about 121 in 1990. Neanwhile, ELS doubled the number of its branches between 1987 and 1990, and also expanded through the creation of subsidiaries: IL Credit Card Co Ltd, Korea Investment & Securities Co Ltd, and Pan Korea Investment Management were established in 1989 and ELS Investment Co. Ltd was founded in 1990. US has continued to intensively train its staff, either using EBI or overseas institutes or performing on the job training. RL encourages its employees to seek-out for self improvement by providing financial support for language courses and higher education. (2) Extent of Adherence to Loan Conditions 3.28 The conditions that project entities had to comply with were similar to those set for the UPI (see para. 2.24 to 2.26). The Goverament had to comply withs (a) Technical conditions onlanding proceeds of Parts A and I respectively to EDB and KLB; onlending proceeds of Part Cl to agencies and institutions participating in the training programs entering into an agreement satisfactory to the Bank with RB1 for the purpose of assisting the Borrower in carrying out Part Cl of the Projects furnishing to the Bank the criteria to be used by I in selecting participants end foreign specialists for the training program. The Government satisfactorily complied with all these conditions. (b) Ex ante- conditions of ajoroval and as _ost conditions of eservisions furnishing to the Bank training contracts amounting to US$ 75,000 or more for prior approval, maintaining procedures, records and accounts adequate to reflect operations, resources and expenditures regarding Part C of the project, having such accounts audited for each fiscal year, furnishing to the Bank a certified copy of the audit's reports maintaining separate accounts reflecting all expenditures. So far', the Government has complied with these conditions. (c) Mutual information conditions: the Government agreed and complied with the condition of having to exchange views on the implementation and progress achieved in the financial sector reforms set forth in the Letter of Development Policy. (d) A volior conditions the Government was committed to maintain an interest rate structure that would enable RDB to earn a reasonable yield on Its equitys this condition was complied with in 1988 and 1989 only, and after the Bank had addressed this issue in letters to IV Because this part of the loan is not yet closed. - 51 - MoF and EDD on May 25, 1988. EDB's yield on average equity was 1.22 and 1.31 only in 1986 and 1987 respectively. It improved to 5.41 and 4.42 in 1988 and 1989, but further strongly deteriorated to 0.92 in both 1990 and 1991, and to 0.42 during the first semester of 1992. This condition was not fully complied with, and leads to observations similar to those already expressed for IPP11'. 3.29 Conditions related to KDB weres (a) Technieal and operational conditions attached to the subloans or to the subborrovers-u. All these conditions were relaxed to foster the disbursement of this loan and the relaxation was further extended to the conditions of Loan # 2309-KOU: in September 1986, the maxim subloan size we increased to US$ 15 million equivalent and the debtlequity ratio of subborrowers was increased to 5:1; RDB's interest rate spread was reduced to 1 percent for the period beginning July 1986. RDB had also to maintain a weighted average spread of at least 2% on its lending operations of foreign commercial borrowings. Because such a spread we outside RDB's effective control, the condition vas, first relaxed in September 1986, and second deleted in July 1987. ZDB had to maintain a maxiaum debt/equity ratio of 10:1, a condition which was net except during 1986. However, concerning this subject, the observations presented for Loan # 2309-KOV remain valid. Lastly, 1DB had to avoid bearing any foreign exchange riek, and effectively did it. (b) RDB agreed to comply with several conditions _of.. sunervisions 1DB positively maintained as agreed procedures and records adequate to monitor progress of Part A of the Project and of each Investment Project, and the operations and financial conditions of ZDB, including the separate accounts based on the Soae. However, RDB was unablo to provide to the Bank, within the covenanted delay., audited financial statements (and the auditor's reports) and it succeeded in persuading the Bank (in June 1989) to be exempted from this covenant. (c) Mutual information conditions (similar to those set for Loan # 2309- KO) were eatisfactorily met by 1DB. It Cf. supra, para. 2.24. 1 The maximum subloan aize was originally set at US$ 12 million equivalent, debt/equity ratio of subborrowere was subjected to a ceiling of 4.5:1, and the annual interest rate charged to subborrowers would be 22 more than the Standard Bank's variable interest rate (as defined in Section 2.05-a, of the Loan Agreement). A' Cf. supra, pare. 2.25. t Cf. supra, para. 2.25. - 52 - 3.30 Conditions_ areed-boMen .thM pank and JILB were exactly the same as those agreed between the Bank and EDB. Compliance by RBL was similar as that of ILB and when the conditions were relaxed for IDB, they were equally relaxed for ELB. The only differences between both institutions beings (1) that LS eventually furnished to the Bank certified reports for 1986-1988; and (i) that ELB had to comply with a 15s1 maximum debtlequity ratio (a ceiling which was adjusted in accordance with the amendments related to Loan # 2309-90)0. C. OPERATIONAL AND FINANCIAL PERFORMANCE OF PROJECT ENTITIES Introdgtion 3.31 Because activities covered under this loan overlap most of those already covered by Loan # 2309-KOU, the following review will be brief and mainly give additional details for 1989-1991. (1) IDB's Performance 3.32 Total a=rolsI, which more or less stagnated during 1987-1989, recorded an increase in 1990-91s the level of about 3,500 billion won approved in 1989, rose to about 4,100 billion won (1990) and further to 5,332 billion won (1991). Foreign currency loans approvals were still stagnant in 1990, V 783 billion against for instance V 861 billion in 1988, and resumed growing substantially in 1991 only. A similar trend characterized domestic currency loan approvals: while approvals stagnated during 1986-1989 the amount approved rose to W 3,556 billion in 1991. Therefore, we may conclude that the lending activity increased noticeably in 1990-1991, compared to its previously stagnating level. Similar trends characterized disbursements. 3.33 The resulting effect on DBI's loans outetanding was a noticeable increase in nominal volumes loans outstanding grew by 20.2% in 1990 and by 25.41 in 1991. The structure of loans outstanding reflected the resumed Importance of foreign currency loans: 25.5 of total outstanding loans in 1991. Changes in the sectoral distribution of outstanding loans are characterized by a marked decline of transport and storage, to the benefit to manufacturing sector. 3.34 XDB's profitability which was mediocre until 1987, somewhat Improved in 1988 and 1989 thanks to exceptional capital gains (1988), and to a temporary better situation in lending rates combined with a substantial reduction in provision for loan losses (1989). However, not profits dramatically deteriorated in 1990 and 1991, and net profits as a percentage of average net worth declined below 1Z in 1990 and 1991. As we have shown before (see para 2.30), IDD is, technically, far from reaching an adequate state of self-sustainabtit because, Cf . supra, para 2.26. The analytical period was 1983-1988 (sometimes 1989), whereas the analytical period for the loan #2571-N0 extends until 1990 (sometime. 1991). - 53 - institutionally, its development remains hamperedby Government's regulations and constraints. 3.35 The ggalit of XDB's loan _ortfolig remained sound until 1988. The percentage of its loan portfolio affected by arrears of over three monthe stayed at 0.22-0.3% until 1988. However, the situation deteriorated somewhat in 1989, 1990, and very dramatically in 1991 when the percentage suddenly jumped to 18.4Z, parallelling a similar dramatic jump for the percentage of it. loan portfolio overdue for less than six months. 3.36 Resource mobilization and diversification remained in line with the trends recorded before as it io shown in the Table belows Table 8: IDB's FUNDING SOURCES (in Z of total amounts outstanding as of end year) 1984 1988189 1990/91 (average) (average) 1. Capital and reserves 11.0 9.5 7.9 2. Borrowing from the Government 12.5 10.7 10.0 3. Borrowing from special Funds 23.5 12.6 7.6 4. Industrial Finance Bond. 11.0 22.5 27.8 5. Deposits 4.5 4.2 5.2 6. Foreign currency borrowings from BoK 1.0 33.3 30.0 7. Loans from abroad 33.0 4.2 4.7 8. Bonds issued abroad 3.5 3.0 6.9 TOTAL 100.0 100.0 100.0 Source: based on data provided by XDB. EDB's level of capitalization further worsened in 1990-1991. Thn diagnosis previously expressed (see para 2.34) on XDB's performance remains valid: XDB was obviously undercapitalized and its profitability was too much constrained by Government regulations. (2) CLB'. Performance 3.37 Over the 1989-1991 period, ILB's outstanding amount of all assets- related operations continued to expand at high rates: 26Z in 1989, 501 in 1990 and 50.61 in 1991. As of end 1991, the outstanding value of debentures owned by KLB reached about 24% of total outstanding value of relevant portfolio items, against 2.61 in 1988. This increase has inevitably resulted in substantial changes in the shares of assets. Domestic currency loans still amounted however to 48.8Z of total relevant assets in 1991, against 57.81 in 1988. Foreign currency loans approvals increased dramatically in 1989, expanded further in 1990 and stabilized in 1991. As a result, loans in foreign currency had their share restored from 181 in 1988 to 231 in 1991. Mewanwhile, equity investments more than doubled their relative share from 1.61 to 3.61. Finally, the amount of revolving funds held by KLB which peaked at W 40.7 billion in 1988, steadily declined to W 8.6 billion in 1991. Overall, during 1989-1991, ILD firmly pursued the - 54 - development of its operations and substantially restructured its asets, through the acquisition of large amounts of debentures. 3.38 ELB's profitabitty increased during 1989-1991. While its income before taxes already reached a record level in 1988, this performance was, later, systematically surpassed, until it reached 85.4 billion von in 1991. SLB' not income, which doubled during the 3-year period 1985-1988, more than tripled during the next 3-year period 1988-1991. However, ELBI' profits' growth is related to ILB access to low-cost funding sources, which are subsidized funds. The share of policy loans in total resources mobilized by ELB was quite negligible In 1985, but it peaked at 14.11 in 1989, before further declining to 9.21 In 1991. As a result, RLB's satisfactory profitability has been reached at the price of a reduction in its self-sustainability. 3.39 The strategy followed by KLB to mobilize and diversify its funding sources remained in line with that followed since 1985. Foreign currency borrowings have been stabilized at 19.5% of total funding sources. Borrowing from foreign banks was maintained at the low share of 4.21, while borrowing in foreign currency from SoK was at a 15% high share. Domestic currency borrowings rose, between 1989 and 1991, from 651 of total funding sources to 70.71, with (i) a continued emphasis on the issuance of debentures and (i) a permanent effort to diversify through deposits. XLB's concern for maintaining an adequate level of capitalization somewhat subsided during 1989-1991: RLB relied too much on its retained earnings to increase its equity and did not increase at all the amount of its paid-in capitalO after 1989. 3.40 Overall, ELB*s performance is good. It seems that the bank is, now, making every effort to rely less on policy loans and to base its strategy on market instruments, a strategy that will pay off when the liberalization of the Korean financial system becomes effective. In addition, during the reviewed period, ELB has noticeably strengthened and diversified its domestic network of branches, subsidiaries and affiliates (108) and also its international banking presence through the establishment of overseas branches and subsidiaries. D. TIDIINGS AND ISSUSS (1) Overall Assessment 3.41 This project suffers from one major drawback: it was initiated and implemented too early. This haste in devising a second project supporting liberalization of the Korea financial system has precluded any possibility of integrating the preliminary lessons from the previous leading operation (Loan # 2309-RO, or IPPI). As a result, possible defects and shortcomings Inherent in the IPPI were carried over to IFP2. I was one of the most important Bank projects in Rorea. M& was planned to be an even more ambitious operation, involving the - Out of the V 611.6 billion in XLB' equity reached in 1991, 331 were retained earnings whereas 67% were paid-in capital. In 1989, when the amount of equity capital was very substantially increased, the share of retained earnings wa only 191 whereas paid-in capital had a share of 81. - 55 - participation of commercial bank40'. Meanwhile, the Bank commissioned a study to analise the situation and evaluate the prospects of the Korean financial systemiP. The report contained, inter alia, statements concerning the commercial banks' and suggested recommendations to address the issue. The Bank did try to account for such recommendations in the preliminary drafts of the LDP submitted to the Korean Government2l, but later on gave up introducing such measures, and as a consequence did not integrate the commercial banks into the project. Integrating the commercial banks into the project would have required a more intensive preliminary preparation and more lead time to discuss the issues with Korean counterparts. Giving up on recommendations for commercial banks may suggest that the Bank gave greater importance to project time delivery than to the full logic of it. lending operation. 3.42 The analysis of the industrial sector was as weak in IFP2 as it vas in IPPI, whether we refer to an ex ante analysis of the expected effects of the lending operationL upon the industrial sector, or to an ex poet analysis of the final benefitsat. The PCR-IFP2 does not make a critical analysis of FRRe or RRe calculations related to XDB operationsIV, although, for instance, ZDB financed one project with an estimated FRR equal to 3.92 and an estimated ERR equal to 9.6%L, i.e. well below the opportunity cost of capital. EDB also supported other projects with very low ZiW. Regarding ELB operations, it is iV Cf. supra, para 2.6 IV R. McKinnon: The Evolution of the Korean Financial System, The World Bank, Industrial Development and Finance Division, East Asia and Pacific Projects Department, Consultant's report, August 1984, 10 pages. In his report, Mclinnon suggests that Korea had the following alternative for further developing and improving the financial systems (a) option 1 which consisted in introducing sharp regulatory distinctions between banks and non-bank., (b) option 2 Inducing the system to move towards universal banking. Although R.McKinnonos report was prepared "in conjunction with the preparation of the Second Industrial Financial Sector Loan to the Republic of Korea" it was only intended to "contribute to financial policy discussions between Korean Authorities and the World Bank.' It seems that such discussions came to a sudden end. MI "A poor portfolio situation", characterized by the existence of substantial amounts of non performing loans and an inadequate capitalization. I Cf. supra, pare. 3.5. a' Only 1.5 page in the SAR-IFP2. W Almost nothing in the PCR-IFP2 (setting aside a few comments concerning the Impact of the credit component). at Cf. PCR-IFP2, para 6.10, p.8 MI The Project No. B-017s "Korea Nuclear Fuel Co." Al For instance the Projects No. B-021, B-024, B-025, B-033. - 56 - almost impossible to derive any Impact concerning incremental employment, investment per worker, total profits, and exports induced by the projects, since considerable economic information is missing. Not to speak of the FiR and ERRa which are provided for 9 subprojects only (out of a total of 62 projects) and which are only estimated values. The issue is why should the Bank continue to request such information if it is satisfied (or if it does not even express its dissatisfaction) with such vague and unreliable data'? Moreover, it is no use calculating averages and medians for such FRs and ERUe if there is no prior assessment of the quality of these economic and financial indicatorsHl. 3.43 The IPP2 policy component copied, with the exception of an additional element for the equity market, the policy component of IPP. This was done without adequately standing back and putting the issues into perspective. As noticed before (para. 3.6), the Bank had reduced its determination to instill concrete arrangements to liberalize the financial system. Setting the objectives was made without appropriate timetables and without adequate sequencing in such a way that, for instance, the PCR-IFP2 does not hesitate to consider that measures taken at the end of 1990, or even during 1991, are direct outcomes of the Bank's loanU'. The comparison between objectives and effective realizations was also frequently ambiguoust for instance, whereas the SAR-IFP2 correctly addressed the main is.mSe related to commercial bak liberalization, the PCR- IP2 claims that the rapid growth of non-bank financial intermediaries is a successful outcome of the Government's reform objectives. Finally, whenever constraints were imposed to project entities, they were promptly relaxed as soon as it appeared that the disbursement of the loan could be endangered. (2) Proiect Identification. Anraisal and Desian ssues 3.44 Basically, even though the Bank's Basic Data Sheet indicate the date of March 1984 for identification, the project was already well identified when the SAR-IFP1 was drafted (i.e. In May 1983), since the draft mentioned a forthcoming Second Industrial Finance Project'. The SAR-IFP2 did not introduce any relevant innovative view concerning the situation of the Korean financial system, except for the identification of issues related to commercial banks. However, as mentioned earlier (par&. 3.41), this analysis did not have an impact on the Government's LDP, and on the Bank's table of "Financial Policies and Reforms during Implementation of the 2nd WIPPat. Basically, the SAR-IPP2 did M' Cf. PCR-IFP2, op.cit., p.8, para 6.10. W Cf. for instance, SAR-IFP2, op.cit., pp.19-20 (par. 4.12) and p.26 (para 4.38). U' See,for instance, SAR-IFP2, op.cit., p.ii, par4. 3 ["Impact of Policy componenti (...) In 1991, the Government announced a new (...) deregulation schedule.*e. a SAR-IgP1, op.cit., p.22, par& 3.3. a' SAR-IFP2, op.cit. - 57 - not address properly the asymmetrical developments between tightly regulated commercial banks and much less regulated non-bank financial intermediaries. Although the SAR-1PP2 mentions that the "difference in regulatory treatment may be penalizing commercial banks to an undesirable extent, the SAR-1P2 does not suggest relevant strategies aimed at rebalancing the financial system; instead it relied upon Government's intentions to further narrow the interest rate differential between official rates and the second-tier financial market. Unfortunately, the results did not live up to the expectations. After 1986, the interest rate differential started to widen again, until it was restored to its high level of the early 1980s in 1991'. Not only non-bank financial intermediaries continued to record an expansion faster than that of banks, but the Government more effectively supported the development of NBF1l than it concretely fostered the liberalization of bankst. Obviously, there is some Inconsistency between SAR-IFP2 statements which supported interest rate measures to rebalance the financial system and the PCR-IFP2 statements which consider the continued development of VBFls as a successful achievement. (3) Loan Conditions Issues 3.45 General comments made for the loan conditionality related to the TPP11t still hold for the present lending operation. Nevertheless, specific circumstances and events have accompanied the life of this loan. As a result, some new considerations must be brought in at this stage. 3.46 Whereas the project entities complied with most of the formal loan conditions most of the project-related conditions have been either adjusted, or relaxed, or even deleteds (a) The Rorean Government was unable to comply with the condition that it would maintain an interest rate structure allowing RDB to earn a reasonable yield on its equity. (b) 1DB was unable to provide the Bank with audited financial statements and was ultimately exempted from this covenant. Such an exemption gMacessa&i introduces elements of uncertainty. (c) XDB's inability to disburse the loan proceeds triggered a chain of major adjustments. First, since 1DB was still carrying a substantial amount of uncommitted funds out of the 1111, the Bank had overestimated the lending requirements of IFP2. Second, adjustments introduced to foster EDB*s loan commitments were inevitably to spread to 1LB, in order to avoid inequitable treatment of both project entities and to even out levels of lending over time. Third, It Cf. supra, Figure 6. st Cf. supra, para 3.15. MI Cf. supra, para 2.49. e 58 - Institutional financial discipline was relaxed after the following measures vere takens (I) the maximum the subloan size was increased from US$ 12 million equivalent to US$ IS million equivalentl (ii) the subborrowers' debtlequity ratio was Increased from 4.5:1 to 5s1; (iii) XDB's interest rate spread on Bank's fund sublending was reduced to 12; (1v) EDB was exempted from maintaining a spread of at least 2% on its lending operations related to foreign commercial borrowings; and (v) ELB benefitted from the same adjustments. 3.47 Even these adjustments were insufficient to protect the loan from subsequent disruptions. The Bank* loan conditions could not initially compete with the BoR Won Export Facility providing funds, at about 11% with no foreign exchange risk. Although this facility was abolished in 1986, the decline in international interest rates made the Bank's loan terms and condition largely uncompetitive. Loans in foreign currency were available to Korean enterprises from commercial banks at below 8% and at about 8.251 from DFIs against about 10.6% plus the foreign exchange risk for the Bank's loan. In addition, as-aoon as Februay 1985 (i.e. before Board presentation and approval of the loan), the US$ exchange rate against major currencies started to depreciate. This activated changes in the Bank's Currency Pool Index (CuPI) in a way that became adverse to the interests of the Borrowers. Because the Borrowers had to comply with the "General Conditions Applicable to Loan and Guarantee Agreements of the Bank, dated January 1, 19854', and with the Currency Pool System (CPS) adopted in 1980, the depreciation in the US$ exchange rate automatically translated into an increase in the CuPI value. In turn, this increase generated a permanent and long-lasting increase in the repayment obligations' of debts incurred as of spring 1985. The Bank was aware that another Bank project,' was, since April 1985 (i.e. again before Board presentation and approval of Loan # 2571-10) in abeyance regarding its signaturef, precisely because the Borrowers were reluctant to bear such substantial additional costs Implied by the CuPI mechanismUl. It is therefore not surprising that a substantial amount of the loan had to be canceled on the IDB sidel'. Even though gL did not enter into §1s I.B.R.D.s General Conditions Applicable to Loan and Guarantee Agreements, Washington, The World Bank, Edition of January 1, 1985. The relevant sections of this document are sections 4.01 to 4.10, pp. 5 to 8. A i.e. principal plus interests plus other charges. 0 The Loan # 2515-10s Small and Medium Industry Project. I' The loan was approved by the Bank's Board on April 16, 1985, but the signature occurred only on October 29, 1986, with a 50% reduction of the initial amount approved by the Bank'*s Board. ft The detailed story has been reported in ORD's Performance Audit Report related to the loan # 2515-10, paras.3.21 and 3.22. gy Out of IDB's planned total borrowing of US$ 100 million, US$ 38.9 million were canceled (on four different occasions). Additional cancellations concerning ELB's borrowing, resulted in an overall amount of cancellation of US$ 44.9 milliong or * 59 - the process of massive cancellations, it had to handle substantial prepaymentas out of the US$ 118 million borrowed by IB, about US$ 42 million (about 36%) have been prepaid. Finally, when they wrote their respective parts of the PCR-1FP2, IDB and KLB focused mainly on the drawbacks of the CPS0'. (4) Erolect Sgpervision Issues 3.48 Since both KDB and KLB are trustworthy institutions, with a well established experience in project selection, and with a past close association with the Bank, they may have required only limited supervision. However, given the expected macroeconomic and structural Impact of the project, the supervision was, to some extent, superficials two supervision missions were organized by the Bank; the first one (April 1986) covered a combined supervision of IPPI and IFP2 and involved 2 persons only for 2.4 weeks, the second one (March 1988) involved only one person for 2.4 weeks; overall, the supervision mobilized 17.1 staffweeks, or 102 of total staff inputs related to the project. This may be considered as being low for a project that required substantial investigations in the area of its industrial impact evaluation and structural Implications, and that recorded substantial changes in project implementation. (5) Impact of Bank Association 3.49 The Bank has contributed to the expansion and the modernization of the Korean industrial sector, even though it did it without a systematic and thorough analysis of the SMI sector. Fortunately, the Bank was efficiently supported in the field by KDB and RB, two Korean financial institutions having an excellent knowledge of the domestic industrial structure, of its needs, of its potentials and capabilities. In this way, the Bank association with KDB and K[L is a strong achievement. 3.50 As far as institution building is concerned, things should be considered from a different angle. The Bank association with KLB started 25 years ago and that with KDB 18 years ago. It is therefore near the final stage of a long lasting and eventually successful process that has unquestionably contributed to make those two DFIs mature and reliable institutions. However, the Bank was less successful in promoting adequate levels of capitalization and profitability for KDB. ZDB is a public institution which must comply with Government's guidelines and regulations and comply, in the same time, with Bank's conditions. This may introduce inconsistencies. As a result, giving more autonomy and independence to RDB will be a major issue when the Korean authorities handle the effective liberalization of the banking system. Finally, the Bank association with KDB and KIB has also helped familiarizing them with the world of international finance. In the present world of global finance and increased opening of leading economies, this will be a major asset. about 211 of the total originally planned amount (US$ 218 million). II PCR-IFP2, op.cit.i1. KDB Review of the Project, Part II, page 1, para (c) and (d); 2. KLB's contribution, Part II, page 3 Section C ("Overall Evaluation of IBRD Funds and Future Cooperation between IBRD and KLB"), paras 6 and 8. * 60 - 3.51 When it comes to the association between the Bank and the Government to promote reforms of Rorea's financial sector, the Bank enjoyed excellent relations with the Government, but the results were not always up to expectations. Bank's effort, to introduce, within the reform process, deadlines and concrete measures were not successful as we may see when comparing the first draft of the LDPI and the final version of this letter. The Bank started operationally to raise the issue of making the interest rates more market determined in 1983 but had to wait until 1991 to be provided with a genuine program in this area. The 1991 program included sequencing of financial policy measures, which does not appear to be the result of any discussions between the Bank and the Government in the framework of IPI and ISP2. The Government attempted to liberalize interest rates in 1988, but reversed the policy the following year, as the market rate increased with tight monetary control. The liberalization of the commercial banks could have been on the common agenda of the Bank and the Government, but 4e facto the Government supported much more the growth and liberalization of the non-bank sector. In conjunction, whether the Government steadily reduced, in accordance with the Bank's suggestions, the weight of its policy loans, it did it essentially through alleviations concerning the non-banks, whereas policy loans channeled through the banks proportionally increased between 1985 and 1990, a strategy which is not very consistent with the objective of liberalizing the banking sector. Achievements in the area of corporate indebtedness have been more the result of a favorable macroeconomic situation, i.e. surpluses in the current account of the Balance of Payments, than the result of a common Bank-Korean Government strategy. Equity market development is the area where the common strategy was the most successful, although the Government waited until 1990 to take decisions aimed at internationalizing the Rorea's market. (6) Sustainability of Lendinj Operations 3.52 Due to similar structures of Loans No. 2309-10 and 2571-R0 and due to the fact that these loans covered overlapping time spans, many conclusions concerning this loan are similar to those already made for the IYP1. 3.53 The liberalization of Korea's financial system is still far from being completed. In April 1992, the Government requested the Bank to provide technical assistance in preparing a blueprint for financial sector deregulation and market opening which should be the basis for carrying out further policy changes to liberalize the financial sector. The Bank prepared a Financial Sector Report which was discussed in January 1993. The Report covers the following subjectst (a) macroeconomic context for financial sector reform; (b) money market and monetary policy; (c) credit allocation; (d) liberalization of the foreign exchange system; (e) bank supervision and regulatory framework; (f) bond market; and (g) proposed financial sector reform. 2V Dated October 25, 1984, drafted at appraisal and included in the Bank's issues paper. Cf. supra, para. 3.6. - 1 - (7) Lesson. of EIdeaign=e 3.54 The the lessons already derived from the UW *r eti v*lsd for the IfP2. evertheless, spifte diffA1tie9 reUted to the M1P2 Maest that two additia lesson need to b* brought into the Slobal pioture. rom 111, the follown le«aons vare derivedt (a) £&Sj, at appra al, 6 fuli essment of the aoroeconom " nv- ronment uset bo mda, including the itkely apl~lattom oD the f~nenatal 8eotor polte* and the projets (b) ggg, øolutlone should b* sought to lutroduce more compatibtitty betmeen the arrangements of the CIS and the borroer*' need. to adequatøly hedge agatn=t the for~g exchange risk. W Cf. para. 2.52. * 63 - STATSTICAL ANNEX Table 1: STRUCTURE OP FINANCIAL IABILITIES OF KOREAN ENTERPRSES 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (mbiion won) . Toda Lw of En~ 85547.0 99713.4 114433.4 131461.4 148305.8 164131.6 181246.7 217287.0 268004.8 324689.3 R. Total consolidat asst 189467.7 225117.6 264536.4 311958.1 355442.5 415916.7 497866.2 613290.2. 755117.8 920157.8 (liabilities) of aR Kora sectors_ A.m%of (m%) Shor-term Securities 3.85 4.12 3.67 3.13 3.75 3.26 4.06 6.23 6.15 4.63 L~mg-Trm Securiis 5.85 6.45 6.88 7.69 7.85 7.83 7.99 8.96 11.51 13.99 Stoks 7.85 8.62 9.03 8.70 8.83 10.01 11.68 13.82 13.03 12.36 Equiti~s other than stocks 8.35 7.83 7.59 7.49 8.05 8.17 8.03 5.90 5.23 4.93 LoasbyFinialntituti 31.91 32.08 34.45 35.83 35.86 36.21 35.48 35.90 36.50 37.74 Govern L.mlns 3.31 3.19 2.88 2.72 2.57 2.05 1.66 1.36 1.13 1.04 Trade Crdit 12.95 13.49 12.91 12.44 12.25 12.35 11.85 10.90 10.09 9.65 Foreignddbts 11.75 11.61 9.98 9.42 8.56 7.06 6.09 4.97 5.46 5.58 Måseennous 14.18 12.60 12.60 12.58 12.3 13.01 13.15 11.98 10.90 10.08 - -1- B. in % of _ (m %) Sho-erm Socuritis 1.74 1.82 1.59 1.32 1.56 1.29 1.48 2.21 2.18 1.63 Ing-TernSecuities 2.64 2.86 2.98 3.24 3.28 3.09 2.91 3.17 4.09 4.94 toeks 3.54 3.82 3.91 3.67 3.68 3.95 4.25 4.90 4.62 4.36 Equities oher hanocks 3.77 3.47 3.28 3.16 3.36 3.22 2.92 2.09 1.86 1.74 Loans by Financial inotitutinn 14.41 14.21 14.90 15.10 14.96 14.29 12.92 12.72 12.95 13.32 Goverwn~tLIans 1.49 1.41 1.25 1.15 1.07 0.81 0.60 0.48 0.40 0.37 Trade credit 5.85 5.98 5.58 5.24 5.11 4.87 4.31 3.86 3.58 3.41 Foreign é*s 5.31 5.14 4.32 3.97 3.57 2.79 2.22 1.76 1.94 1.97 Misceeaneous 6.40 5.58 5.45 5.30 5.13 5.13 4.79 4.24 3.87 3.56 Sourc: The Bank of Kor, National Account , 1990, pp. 243-459. Table 2: SIMPLFIED STRUCTURE OF FINANCIAL LIABILTIES OF KOREAN ENTERPRSES 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 _____________ (i%)___ Short.t~m Scau~itis 3.85 4.12 3.67 3.13 3.75 3.26 4.06 6.23 6.15 4.63 Lng-Trm Somfritics 5.85 6.45 6.88 7.69 7.85 7.83 7.99 8.96 11.51 13.99 Stocks + Odm equilis 16.20 16.45 16.62 16.19 16.88 18.18 19.71 19.72 18.26 17.29 Lonsby PnnaIndämuion 31.91 32.08 34.45 35.83 35.86 36.21 35.48 35.90 36.50 37.74 Govenm~nlLomns 3.31 3.19 2.88 2.72 2.57 2.05 1.66 1.36 1.13 1.04 Odr 38.88 37.70 35.49 34.44 33.11 32.42 31.0 27.85 26.45 25.31 TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 100.% 100.00 100.00 100.00 WEIGMTS OF FINANCIAL LIABILTIES OF KORPAN ENTERPRISES IN TOTAL KOREAN FINANCIAL ASSETS 1982 198 1984 19 1986 197 1988 1989 1990 1991 Shott~ Soities 1.74 1.82 1.59 1.32 1.56 129 1.48 2.21 2.18 1.63 Long-TmSeuridis 2.64 2.86 2.98 3.24 3.28 3.09 2.91 3.17 4.09 4.94 Sts+ Othrqui s 7.31 7.29 7.19 6.82 7.04 7.17 7.18 6.99 6.48 6.10 Lmns by Pa~ ui ionh 14.41 14.21 14.90 15.10 14.96 14.29 12.92 12.72 12.95 13.32 Govolnm~et LMs 1.49 1.41 1.25 1.15 1.07 0.81 0.60 0.48 0.40 0.37 Other 17.55 16.70 15.35 14.51 13.81 12.79 11.32 9.87 9.39 8.93 TOTAL 45.15 44.29 43.25 42.14 41.73 3944 36.40 3544 35.49 35.29 Soure: Basdom Table1. TaM 3: PINANCIAL RATIOS OF TRE KORAN MANUPACTURING SBCTOR . INDBTEDNESS RATIOS 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 _____________________ cm %) 1. Toli borrwing to total ass~ 45.90 43.70 41.50 46.70 46.00 42.90 39.40 38.50 42.80 44.60 2. Stocko .equity to tal suets 20.60 21.70 22.60 22.30 22.20 22.70 25.30 28.20 25.90 24.40 3. Fin. cxpssn to tot. bor~owin 16.00 13.60 14.40 13.40 12.50 12.50 13.00 13.60 12.70 13.00 4. Pkanoialoex~sstoalms 6.60 5.20 5.00 5.30 4.90 4.60 4.60 5.10 5.10 5.70 M. PROPTABILTY RATIOS 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 5. Ordinr bneome to otal m smea 1.00 3.30 3.40 3.00 4.50 4.40 4.90 2.70 2.40 1.80 6. Ordin. noaw to utokh. equity 5.30 15.50 15.20 13.20 20.20 19.90 20.60 10.10 9.10 7.00 7.Ordinaey inco0eouss 0.90 2.70 2.7012.50 3.60 3.60 4.1 2.30 1.80 TM 4: EXs PUNDG SOURCES __~_dm~N__f(Wbilion, 8im 1984 1985 1986 1987 1988 1989 1990 1991 1. Capial and esers 77.0 2.7 88.4 95.0 102.8 180.3 505.4 555.3 611.6 2. Dosne mi y boowing 364.4 465.7 606.3 787.9 1063.4 1434.6 2028.5 3132.5 4416.6 2.2 Depos (*) 22.4 29.1 28.7 51.7 52.6 105.1 167.0 301.9 462.5 2.2 Ddumnoes issud 340.4 435.1 575.3 723.1 861.4 1033.8 1417.7 2251.8 3381.0 2.3 p o ~eylona 1.6 1.5 2.3 13.1 149.4 295.7 443.8 578.8 573.1 3. I8n auny bonowng 456.8 506.5 672.2 756.4 754.5 654.1 610.6 825.1 1216.2 3.1 rom foroi8a banks 456.8 506.5 672.2 756.4 479.6 259.3 167.7 200.2 260.4 3.2 fom BoK 274.9 394.8 442.9 624.9 955.8 TOTAL 898.2 1054.9 1366.9 1639.3 1920.7 226.0 3144.5 4512.9 6244.4 So~rn based on dda psvided by ELB. Note: (*) Inscm~iing deposis in forei eeney. Table 5: NLB's FUNDING SOURCES (in % of Toal am )Is) 1983 1984 1985 1986 1987 1988 1989 1. Capithl and serv s 8.57 7.84 6.47 5.80 5.35 7.95 16.07 2. Dometio ou~mney bono wings 40.57 44.15 44.36 48.06 55.37 63.23 64.51 2.2 Deposit (*) 2.49 2.76 2.10 3.15 2.74 4.63 5.31 2.2 Debe~tu~ssued 37.90 41.25 42.09 44.11 44.85 45.56 45.09 2.3 Polky oans 0.18 0.14 0.17 0.80 7.78 13.03 14.11 3. Po~ign cufcy bonowings 50.86 48.01 49.18 46.14 39.28 28.83 19.42 3.1 frm ruis bank 50.86 48.01 49.18 46.14 24.97 11.43 5.33 3.2 from BoK 0.00 0.00 0.00 0.00 14.31 17.40 14.08 1TAL 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Som=er bused on data pmsvidd by KL. N~: (*) lantading deposits kn figa cnn~y. Table & NTERST RATIES DFERENTIAIS DI KOREA 19801992 RATE i %) REDIFRNTIA (i %) Cwb Comon~e 1 Yer time Cerb Crpente 1 Yar time Yars Mad~t Bonds Deposi Mad~t Bonds Depoils 1980 44.9 30.1 19.5 -14.8 0.0 10.6 1981 35.3 24.4 16.2 -10.9 0.0 8.2 1982 30.6 17.3 8.0 -13.3 0.0 9.3 1983 25.8 14.2 8.0 -11.6 0.0 6.2 1984 24.7 14.1 10.0 -10.6 0.0 4.1 1985 24.0 14.2 10.0 -9.8 0.0 4.2 1986 23.1 12.8 10.0 -103 0.0 2.8 1987 23.0 12.8 10.0 -10.2 0.0 28 1988 22.7 14.5 10.0 -8.2 0.0 4.5 1989 23.1 15.2 10.0 -7.9 0.0 5.2 1990 19.9 16.4 10.0 -3.5 0.0 6.4 1991 23.4 19.7 10.0 -3.7 0.0 9.7 1992* 24.4 17.6 10.0 .6.7 0.0 7.6 Sours: 'Ie Bank of Koma, Mothly &.~iUIst Bnlldin, various ises; Data prvided to the mision. Not.: * First ~a~nr. Tablk 7: RPAL INTEREST RATE RATES (n %) REAL RKiBS (iM %) cub Corpomrt 1 Yar time Cub Crpente 1 Year time YMMs Maimt Bonds Deposs binn Mariæt Bonds deposit 1980 44.9 30.1 19.5 28.7 16.2 1.4 -9.2 1981 35.3 24.4 16.2 21.4 13.9 3.0 -5.2 1982 30.6 17.3 8.0 7.1 23.5 10.2 0.9 1983 25.8 14.2 8.0 3.5 22.3 10.7 4.5 1984 24.7 14.1 10.0 2.3 22.4 11.8 7.7 1985 24.0 14.2 10.0 2.5 21.5 11.7 7.5 1986 23.1 12.8 10.0 2.8 20.3 10.0 7.2 1987 23.0 12.8 10.0 3.0 20.0 9.8 7.0 1988 22.7 14.5 10.0 7.2 15.5 7.3 2.8 1989 23.1 15.2 10.0 5.6 17.5 9.6 4.4 1990 19.9 16.4 10.0 8.6 11.3 7.8 1.4 1991 23.4 19.7 10.0 9.7 13.7 10.0 0.3 1992* 24.4 17.6 10.0 6.4 18.0 11.2 3.6 Sao: Dumed on data povidd by dm Ko~n Authori~es. N : * First amm~an. Tabl S: GOVERNMENT SCHEDUIE FOR INTERET RATE DERGULA.TION LöftnJeDpoit Bonds Step 1 (2ad haf of 1991 to Bank ov~rat (nt bank koan Short an, larg. wed ama Coqpoatebonda with matbuiis fautwk 1992). of lms thOn 20 days). mdAnted dpouil. of 2 Yfs and over. Dämcot of conm. bile (Ca~ thelcita of Dosi. thos eigi BoK rediscow*). Disoancsn e . papers and Lag åmd *onm. papers, and Tradebila. Tad. bills sales LLrse-is. mn evenia. Deposits with maaturi. of 3 ymar and over. Step 2 (2nd heff of 1992 to end Los of banks and noa~k Deposit of Banks and nonbank Corporte bonds with m~aturiti of 1993). a~ insmuc~ (~ fin. it d. with n r~ ks ta 2 yars. ans finaned by Gov. funds and of 2 yeas and over. BoK redis~. Stop 3 (1994 to 1996). Loans ~nnoed by tho Government Deposits of banks and nonbank Bank debet&u~ with mnuitiu and BOK rediscount. fin. intened. with ~mturi. < < 2 ya. 2 years ~xoept demand d~posita. Montary uOabilifa bonds. Further dm~gulat. of short term mnteoieted deo- s Introduction of ne financial -. linked to ma*m mte (e.g. MMCN). stop 4 (A m 1997). Al ether short term ates not All Governnet and Publik yet deregu~tmd and dead bonds. Som: Table pm~vided by tbo Bank of Korea. - 73 - PROJECT COUPLTION RasORT KOREA SECOND INDUSTRIAL FIANCE PROJECT (LOAN 2571-0-0 AND 2571-1-0) June 29, 1992 East Asia & Palfte Regional Office Country Depart~ent 1 Inductry and Energy Operatlonm Diviaion - 75 - SECND *UMS AL FMM* PmC (LOAN 2571-0-10 and 2571-1-10) I I PROJECT REVIEW PROM BANK'S PERSPECTIVS 1. Proleot Identity Project Names Second Industrial Finance Project 1/ Loan Nos 2571-0-0 and 2571-1-10 RVP Unit: East Asia and Pacific Country: Republic of Korea Sectora Industry Subsector: Finance 2. Project BackSround 2.1 Having realized the limitations of Its interventionist approach to Korea's industrial development during the 1970s, the Government embarked upon a policy of industrial, trade and financial liberalization as reflected in the Fifth Five Year Plan (1982-86), and in agreements made with the World Bank under the structural adjustment loans of 1981 and 1983 (SAL I and SAL II) and the first Industrial Finance Project of 1983 (Part III, Table 1). Beginning in 1981, the Government initiated major reforms of the industrial, trade and financial sectors aimed at ner AU&, Improving the resource allocation and increasing the effectivenes, of financial intermediaries by gradually reducing its direct intervention in favor of direction from incentives and market signals. While taking advantage of the Bank's Financial Sector Review (1979), in 1981 and 1982 the Government took specific measures for a gradual liberalization of short-term interest rates on commercial paper, simplification of commercial bank regulations, privatization of government holdings in commercial banks, and for rationalization of lending structure together with partial removal of subsidized lending rates and widening of interest spreads for financial intermediaries. 2.2 Moreover, maturity attained by the Korean development finance institutions (DFIs) -- partly as a result of the Bank assistance -- coupled with Government9s willingness to addroes the industrial and financial issues enabled the Bank to shift its lending objectives from Institution-specific is- sues to sectoral policy issues. The first Industrial Finance Project (Loan 2309-10), approved by the Board in 1983, reflected Bank's new approach to industrial lending in Korea. Its principal objectives were to: (a) support 11 The technical assistance component of the Project (Loan No. 2571-2-M0) is not covered, because it is expected to be fully disbursed by September 1994. * 76 - the Government's financial sector policy reforms to be accomplished during 1983-1985t (b) enhance foreign exchange resources of the Korea Development Bank (RDB) and the Korea Long Term Credit Bank (KLB) to meet requirements of priority industrial investments; and (c) strengthen the financial system through a technical assistance program, implemented by the Korean Banking Institute (KBI) and the Ministry of Finance (MO). Given the Government's commitment to progressive sector liberalization, in part due to the enormous complexities involved, it was understood that another Bank project would be required to assist the Government in carrying forward the task of deregulating the financial and strengthening the banking system. Hence, the Second Indus- trial Finance Project (Loan 2571-KO) was approved in 1985. 3. Proiect Objectives ad Description 3.1 The Project's principal objectives were to: (a) support the Government's financial sector reforms, particularly liberalization measures, through 1987; (b) support industrial Investment by providing the Korea Development Bank (RDB) and the Korea Long Term Credit Bank (ILB) $100 million and $120 million, respectively, for lending for the foreign exchange costs of investments in plant and machinery by their clients in the industrial sectors (c) assist RDB and 11 to adapt to the changing financial sector environments and (d) support government efforts to strengthen the financial system through a technical assistance component of $2 million to provide training for key officia.e of financial institutions and related Government agencies. In response to Government's request, the Bank had agreed in January 1988 to reduce KLB's allocation from $120 million to $118 million and increase the technical assistance component from $2 million to $4 million. 3.2 The Project was a primary vehicle for Bank involvement in Korea's financial sector reforms. In particular, the policy dialogue between the Bank and the Government during FY85-87 was based on the Finance Minister's letter of May 10, 1985. This letter had outlined the five main issues: (a) de- control of interest rates; (b) reduction of directed credit; (c) commercial bank liberalization and supervision; (d) control of corporate indebtedness and (e) equity market development. Besides outlining each issue and the Government's objectives in dealing with it, this letter specified the measures expected to be implemented through 1987 and monitored by the Bank. The Project also provided credit to cover the foreign exchange cost of industrial equipment imported by private firms seeking to acquire, build, modernize or replace productive assets. The Project addressed financial and institutional issues related to RDB and RLB that were initiated under previous projects. Finally, the Project provided technical assistance for the training of managers in private financial institutions and in related Government agencies. 4. Proiecg Delian and Ortaniasion 4.1 The Project had a clear conceptual foundation, which was shared and understood by all relevant parties. It was the second project in a series of lending operations aimed at carrying forward the financial sector reforms in Korea. The scope, timing and scale of the Project were appropriate in the light of its objectives. The Project was well prepared. The roles and responsibilities of the project entities were clearly defined and understood. - 77 - In addition to the maturity of the institutions involved in implementing the Project, a clear understanding of the operational responsibilities also con- tributed towards its effective implementation and success. 4.2 The Project design and organizational set up did not require an innovative approach, since the Bank had just initiated a multi-institutional lending approach under its predecessor project. The same two DFls -- KDB and ILB -- were chosen for implementing the credit component. EDB is the largest source of term financing for industry in Korea. Though operating primarily as a financing arm of the Government's industrial investment policies, KDB had also become a major source of lending to the private sector. RLB was the only privately owned development bank in Korea at that time, and was engaged in a full range of development banking servi,** to private enterprises. These DFIs were encouraged to cofinance with commercial sources. The loan was made to the Government at the Bank's standard variable interest rate. The Government was to relend proceeds of the credit component to RDB and KLB on the same terms as the Bank's loan but with an administrative fee of 0.5 percent. EDS and ELB were to relend the credit component at a variable interest rate at least 2 percent above the effective borrowing cost. As discussed in para. 5.4, the administrative fee was waived and the 2 percent margin was reduced to 1 percent. KDB and KLB had two separate adjustable composite amortization schedules. 4.3 The eligibility criteria for subloans initially allowed a maximum debt-to-equity ratio of 4.5:1, which was later raised to 5.0:1 (para. 5.4). The subloans had a maximum maturity of 13 years (including a grace period of up to three years). The final borrowers had to carry the foreign exchange risk. The free limit for subloans was $6 million and the subloan ceiling was originally fixed at $12 million, but was later raised to $15 million (para. 5.4). A maximum combined exposure limit of $15 million was stipulated under the loan for any single subborrower from KDB and ELB. The loan proceeds were to finance 100 percent of the reasonable foreign currency cost of directly imported goods and services, and 60 percent of the reasonable local currency cost of the goods manufactured or procured in Korea. 4.4 RDB's and ILB's procurement procedures confirmed to the Government guidelines and Bank requirementas limited competitive bidding, with at least three competitive quotations provided by potential suppliers, or proprietary contracts in qualifying cases. These procedures effectively encouraged compe- tition in a well-developed Korean market. Similarly, KDB's and Ku's dis- bursement procedures were adequate and ensured that the funds were made available in accordance with progress in project implementation and against proper documentation. Special accounts in the amount of $13.2 million for KDB and $15.8 milion for KLB were established, from which the Bank reimbursements of subloans were obtained. The Bank disbursements were made against full documentation for subloans in excess of $2.0 millions for subloane of $2.0 million or less, the Statements of Expenditure (SOs) were used. 5. Proiect Implementation 5.1 Critical Variances in Prolact Implementation. The credit component of the Project was a typical financial intermediary operation, involving two - 78 - well established Dne (SDB and LB) . Yet, the actual disbursements significantly deviated from the planned schedule of disbursing $220.0 million over the five year period of 1986-1990g the final cumulative disbursement amounted to only $176.5 million and was completed in March 1989 (instead of the planned December 1990). These deviations arise primarily due to RDB's inability to use the Bank loan, as reflected by the eventual cancellation in the amount of $38.9 million (on four different occasions) out of its planned total of $100.0 million. EDB'a subloan commitments had a delayed pick-up, partly because as the loan to the second in a series, IDB was still carrying a substantial amant of uncommitted funds out of the first Industrial Finance Project. Actually, contrary to the Staff Appraisal Report's (SAR**) estimated disbursement of $20.0 million during 1986, KDB's actual disbursement vaes sero (Part III, Table 3). Three factors seem to have contributed to EDB's slower disbursements and eventual cancellation of almost 40 percent of its loan amounts (a) the Korean economy experienced a sudden major downturn, largely resulting from a sluggish international economic environmentl (b) potential subborrowers had access to the Bank of Korea*o (B0K's) Won Export Facility (WEF), abolished in 1986, providing funds for purchasing both domestic and imported equipment at an interest rate of 11 percent with no foreign exchange riski and (c) higher rate of interest on the Bank subloanst for instance, at 10.6 percent rate of interest with foreign exchange risk, the Bank loan considerably lost its attractiveness since loans in foreign currency were available to Korean enterprises from commercial banks at be2w 8.0 percent (i.e., LIBOR at around 7.0 percent plus 0.875 percent spread) and at 8.25 percent from Dnle. ELB, as a privately-owned DFI, however, managed to come up with a marketing strategy for its clients in the form of an attractive loan package comprising of both Won currency and the Bank funds. EDB, as a government-owned institution, was, however, obligated by MOP to give priority to Won denominated foreign currency loans, which were more attractive to clients than the Bank loans. Disbursements substantially increased during 1987 and 1988 due to the Improved economic conditions, Increased investment demand and closing of the 1OK's VY. 5.2 Both IDB and ELB experienced difficulties in adhering to the six- month time limit for furnishing to the Bank their audited annual financial statements. While ELD eventually complied with the covenant (Section 3.02 of the Project Agreement), 1DB succeeded in persuading the Bank in June 1989 to exempt it from this covenant (Part III, Table 4). 5.3 Prolegt Risks. The Project riske were correctly identified and realistically calibrated. The institutional risks involved in the Project were minimals IDB and ELB had a proven track record of satisfactorily administering Bank's previous five and nina loans respectively. The business risks facing the potential subborrowers were not unusual in the light of Korean enterprises' past satisfactory performance. The SAR had correctly identified that the main risk was associated with the Implemntation of the financial reform program, outlined in the Government's Policy Letter. And even this risk was worth taking. 5.4 Actions lDecisions Taken or Not Taken Which Affected Proget toolementation. The inadequacy of IDB's profitability remained a continuing source of Bank's concern. EDB had agreed to maintain a weighted average - 79 - spread of at least 2.0 percent on its lending operations out of foreign commercial resources, and had stated in its Outline of Development Strategy, 1985-1990 that it would endeavor to realize a reasonable rate of return on its equity. But, as a Government-owned institution, setting of adequate spreads was beyond its purview. Moreover, even the 2 percent spread on the Bank loan had to be curtailed due to market competition (as indicated In para. 5.1), and 1DB's profitability continued to decline. The Bank had virtually no choice but to accept this situation as fait. accomnli. 1DB's debt-equity ratio had risen to 11.5i1 in 1986, against the agreed limit of 10.0i1 or below. However, this temporary default was corrected through an increase In XDB's capital in 1987 and since then the covenant remains in compliance. During the early phase of the project Implementation, the Bank had agreed with IDB and RLB to (a) raise the maximum size of a aubloan from $12 million to $15 millioni (b) reduce the minimum spread on subloans from 2 percent to 1 percentl and (c) raise an eligible subproject's debt-equity ratio from 4.5s1 to 5.0:1 (Part III, Table 4). These amendments to the Loan/Project Agreements accelerated the subloan commitments and disbursements. 6. Project Results 6.1 Imact of Policy Comonet. The Project achieved both of its principal objectives: encouraging the financial sector policy reform and stimulating the industrial investment in Korea (paras. 3.1 and 3.2). There was no need to consider any significant change in these objectives during project implementation. The main rason dietre for this Project was to encourage the Government to carry forward the long-term domestic financial reform program, initiated by it during the early 1980s and supported by the Bank, J,na AI&9 under the first Industrial Finance Project (para. 2.1). The reform program was expected to: (a) improve resource allocation by decentralizing decision-making so that financial institutions and entrepreneurs could respond more flexibly to market forcesi and (b) raise efficiency in financial intermediation by subjecting Intermediaries to greater competition through freer entry and fewer legislative and administrative constraints on their activities. The Government made significant progress towards achieving these objectives through its steady but cautious approach, as outlined below. 6.2 (a) Decontrol of Interest Rates. The Government had gradually liberalized the lending rates; by December 1988, it had taken several steps to decontrol them by narrowing the differential between market and controlled rates (e.g., differential of 5.1 percent in December 1984 was continually reduced to 0.8 percent by May 1987), and maintaining real (positive) interest rates (e.g., 5-7 percent on bank deposits and 7-10 percent on bank loans). The Government decontrolled most non-bank lending rates, capital and money market rates, and some long-term deposit rates. However, bank interest rates remain tightly regulated. As a result, the share of non-bank fiancial institutions (NBls) in the financial system Increased sharply and accounted for 601 in 1990. The gap between corporate bond yield and curb loan rate sharply narrowed down from 10-13 percent range during 1981-87 to 2 percent level by 1990. Still, the outcome was less favorable than anticipated, mainly due to the turnaround in macroeconomic situation in 1989 (e.g., sluggish export growth coupled with rapid increase in Imports, and pressure on - 80 - inflation). Consequently, the liberalization process was effectively halted and partially reversed. 6.3 In August 1991, however, the Government announced a new gradual, four-phase interest deregulation schedule for the full liberalisation of interest rates in domeetic financial market. The first phase of reform took effect in November 1991 and will be completed by June 1992. It Includes deregulation of interest rates on money market instruments (e.g., bankers' acceptances, repurchase agreements f securities companies, call money, the certificates of deposits of commercial banks, commercial paper, and trade bills). The second phase will extend through the end of 1993 and the third phase is scheduled for 1994-96. Finally, the fourth phase will begin in 1997. 6.4 (b) Reduction of Directed Credit. To increase the efficiency of resource allocation through financial markets, Government's efforts in reducing the proportion of directed credit (policy loans) in total domestic (bank and non-bank financial institutions) credit had mixed results. While the share of policy loans as a percent of bank credits declined from 49.1 percent in 1980 to 39.3 percent in 1985, it rose to 46.4 percent in 1988, and since then it has not changed much. Moreover, interest rate differentials between policy loans and general loans are not expected to shrink for the time being, since the deregulation of lending rates of policy loans is scheduled only in the above-mentioned third phase (1994-96). Although, since 1987 export financing has been phased out to a large extent, increased credit to KDB, ILB and Export-Import Bank of Korea, along with loans to agriculture and fisheries, have more than compensated the decline. Governmert's emphasis on policy loans for welfare-related sector such as housing, and sustained use of "Government Fund" have also contributed to the increase in proportion of directed bank credits. However, the share of policy loans in non-bank financial institutions' loans has sharply declined to 12.7 percent in 1990 from 30.2 percent in 1985 (and 43.9 percent in 1980). Thereby, the proportion of directed credit in the combined domestic credit of both banks and non-bank financial institutions Ias declined from 35.3 percent in 1985 (and 47.4 percent in 1980) to 28.1 percent in 1990. 6.5 (c) Comercial Bank Liberalization and Superigion. Government's reform objectives have been achieved as suggested by the rapid growth in the umbaer of investment and finance companies, investment trust companies, trust services of banks, life insurance companies, and mutual savings and finance companies. There was also an increase in the volume of instruments sold by these institutions, e.g., corporate bills discounted and repurchased, beneficial securities, mutual credits, etc. In particular, the Government undertook the following reforms: (a) entry barriers for commercial banks were further lowered resulting in the establishment of three new commercial banks; (b) the Korea Exchange Bank was granted permission to change its status from a specialized bank to a nationwide commercial bank; (c) a number of additional non-banks were established: five regionally-based securities and investment trust companies, and 18 life insurance companies; (d) four more foreign life insurance companies were allowed to open branches in Seouli and (e) foreign bank branches were placed on equal footing with domestic banks by the removal of certain restrictions on their operations and the contraction of some privileges. It should, however, be noted that a significant increase in the - 81 - number of banks and non-banks financial intermediaries was a result of Government's conscious effort to promote competition in the financial market and not due to a relaxation in the requirements for establishing them. Effective liberalization of the financial market presupposes a sound system of supervision by the authorities. In this regard, the Office of Bank Supervision and Examination (081) Introduced Improved framework of annual bank management evaluation since 1990. 08 now evaluates all the commercial banks based on more transparent performance indicators (such as profitability, stability and liquidity) and gives ratings of AA, A, B, and C, which are announced to the public. Nowever, the supervision function will need to be strengthened further if the deregulation of the financial system were to be accelerated. 6.6 (d) Control of Cororate Indebtedness. The business sector accounted for over 50 percent of total financial accumulation of non-financial sectors during the early 1980s, but the share declined to less than 30 percent during the project period. The decline in share of credit to business firms could be explained by the substantial Improvement of their liquidity situation as well as corporate effort to economize fund holdings as interest rates on these funds relative to their borrowing cost have become less attractive. Higher real interest rates may have also affected corporate investment and financing decision., with increases in the lending rates and phasing out of subsidized credit. Moreover, efforts to promote equity as an alternative to debt have ameliorated the problem. The boom in the stock market enabled the Korean firms to deleverage to some extent. However, the stock market has performed poorly since 1989 and has not been a major source of equity funds. This, combined with low profitability of the Korean firms, have led to a mark^0 deterioration in the capital structure. The ratio of networth to total ass"ts for manufacturing firms, which we 22-23 percent level during 1984-87, improved to over 28 percent by 1989. 6.7 (a) Equity Market Develoiment. In accordance with the four-phase gradual deregulation plan for the capital market liberalization (1981-92), the Government implemented the first three phases and Is currently implementing the fourth phase (1990-92). Since 1985, Korean firms were allowed to issue convertible bonds, bonds with subscription warrants, and depository receipts in international financial markets. Korea's large securities companies were allowed to participate in the syndications underwriting foreign securities. At the same time, securities, insurance, and investment trust companies were permitted to invest in foreign securities. The Government took a number of important steps to increase the scope of foreign participation in the financial services sector and to place foreign and Korean financial institutions closer to an equal footing. The Government authorized the establishment of three *matching* funds in 1990, which balance inward and outward portfolio capital flows. In September 1991, the Government announced the guidelines for opening of the stock market, and it authorized the operation of foreign securities companies in Korea. Finally, with a view to speeding up the liberalization process and eliminating the unnecessary restrictions on external transactions, the Government is currently revising the Foreign Exchange Management Act. As a result, the number of firms listed at the Korea Stock Exchange has grown to 686, i.e., more than double since 1985, and the market capitalization rose from $7.4 billion in 1985 to $96.4 - 82 - billion in 1991. Starting January 1992, the Rorean stock market has been opened for direct foreign portfolio investments, though several restrictions remain. Thus far, torea has been able to attract about $1.0 billion in portfolio investments, substantially less that the $3-4 billion expected. 6.8 The Government remains committed to financial sector deregulation and further opening of the capital account. In this connection, in April 1992, the Government requested the Bank to provide technical assistance In preparing a blueprint for the financial sector deregulation and market opening, which is to be completed by December 1992 and will be the basis for carrying out further policy changes to liberalize the financial sector. The Bank study will cover the following subjectes (a) interest rate deregulation and credit allocation system; (b) foreign exchange and capital account transaction liberalization (c) opening of the bond mast"et to foreign portfolio Investment; and (d) money market development. 6.9 Imgact of Credit Comuonent. (a) Main Characterisuics of Subprojects. A total of 96 subprojects were financed under the Loans 34 by XDB and 62 by LBI, tespectively using $61.1 million and $111.9 million of the Bank loan. Although each D11 financed only one subproject above the free limit of $6.0 million and rheir average subloan size ranged around $1.8-1.9 million, the subprojects financed by them differed In many respects. For example, 1DB almost exclusively financed manufacturing enterprises, the only exception being a transport subproject, sharing 1.6 percent of the Bank loan; ELB lent only 75 percent of the loan proceeds to manufacturing enterprises. Among the manufacturing enterprises, however, chemicals and petroleum, coal, rubber and plastic products enterprises were prominent in both instances. In terms of the geographical distribu;4on also, ZDB and thB differed significantlys RDB financed only 2 enterprises in the Seoul City area, which shared only 7 percent of the loan proceedel ELS financed 45 enterprises in the Seoul ctty area, which shared as much as 83 percent of its loan proceeds. 6.10 (b) Performance of Suborolects Financ4. IDD has provided data on both estimated and actual economic rate of return (ERR) and financial rate of return (MR) fr all subprojects, except one new subproject that vent into bankruptcy. The actual RRs ranged between 5.0 percent and 20.0 percent, including six that exceeded 15.0 percent. The actual FRR. ranged between 3.7 percent and 48.0 percent, including eleven that exceeded 20.0 percent. In general, estimates of the RRM and MRR turned out to be reasonably close to the actuals. ELB, however, provided similar data only for nine subprojects, and in each case the actual and estimate are reported to be the sameS All the subprojects together were expected to create 4,223 new jobs at the time of their approvall whereas they have actually created 4,079 jobs, at an average cost per job of about $43,300. 7. Proect Sustainability 7.1 The benefits accruing to the gorean economy through the financial sector reforms, undertaken by the Government in the context of the Project, and the Industrial investment credit provided under the Project, are sustainable. The Government has been purauing for almost a decade the liberalization of domestic financial market and is gradually opening up the - 83 - capital market. The Government Is also committed to review its policies in the light of the macroeconomic developments. The Project was a vehicle for the Bank and the Government to carry forward their policy dialogue, Initiated during the early 1980s. The dialogue Is continuing through the proposed financial sector study (para 6.8) and a proposed financial sector Investment loan. 7.2 The sustainability of benefits of subprojects financed under the Proj,Act is assured. Both KDB and RLB are well established and mature Dsle, which apply rigorous Investment criteria In selecting their subprojects, and closely monitor the post-Investment development both at the macro and micro levels. 8. Bank Performance 8.1 The Bank was diligent and cost-effective in preparing the Project. Having accomplished the initial institution-'uilding objectives of promoting financially strong and operationally efficie-t DIe in Koreas ait. with Government's strong comaitmenZ and active invol7ement, the Bank initiated policy-based lending during the early 1980s as a part of its long-term lending stiitegy in Korea. Specifically, the Bank coupled the preparation for this project with the supervision of its predecessor -- first Industrial finance Project. The appraisal process, required a post-appraisal mIssion, mainly to negotiate the financial sector policy letter. Although the Bank addressed the issues arising during the Iaplementation phase (June 1985 - September 1990), it had only two supervision missions (April 1986 and March 1988). Moreover, a cancellation of $47 million from the credit component of $218 million reflects that the Bank's appraisal did not adequately account for the tough competition to be faced in lending the Bank funds, largely due to their unattractive terms and conditions. 9. Borrower Performance 9.1 Borrower's performance was satisfactory throughout the project period. In addition to reconfirming its commitment to financial liberalization, the Government set out in adequate details its position on virtually all major sector issues as contemplated at that juncture: Interest rates, directed credit, performance and regulation of commercial banks, corporate indebtedness, and equity market. Government's statement involved deliberation of long-term objectives in dealing with these Issues and a plan of action to achieve those objectives. In turn, it had warranted adoption of a comprehensive and integrated approach to policies designed to promote financial liberalization. Yet, the Government was unable to approve an interest rate structure for RDB, which would have enabled it to earn a reasonable yield on its equity. 9.2 Due to their past close association with the Bank, both 1DB and RLD required only limited supervision for the Project. But they had difficulties in meeting the "six month deadlineO for furnishing the audited reports on financial statements and special accounts. While KLB eventually overcame the delays that were experienced in furnishing the reports for 1986 - 88, the Bank agreed with EDB in June 1989 to exempt it from the submission of such reports. - 84 - Further, to facilitate movement of the Bank funds, the mutually agreed criteria for eligibility of Investment enterprises had to be amended almost at the beginning of project implementation. Notwithstanding Bank's tr tinued concern for a lack of Improvement in EDB's profitability, the muto ily agreed effective spread had to be curtailed to 15 from 2Z. 10. Prolect Relationshin 10.1 Both the project entities (IDB and WLB) and the Government maintained very amicable and effective working relationship among themselves and the Bank during the entire project cycle. Given the cetplexities and sensivities Involved In the financial sector reform, successful completion of the project exemplifies the strength of such a relationship. 11. Project Documentation and Data 11.1 The Loan Agreement and the Project Agreement's were appropriate for achieving the Project's objectives. The Staff Appraisal Report (SAR) provided a useful framework for both the Bank and the Government and Project Entities during project Implementation. Part II and the statistical data fo Part III of the PCR, provided by IDB and ELB, were satisfactory. Since the Bank's project files did not have a supervision mission report after March 1988, preparation of the PCR, especially regarding the policy reform Implementation, had to rely on Bank's mre recent mission reports and other documents. 12. Main Lessons 12.1 In retrospect, the main lessons learned or again confirmed, with Implications to other Bank-financed projects, are summarised belows (a) when estimating demand for a line of credit, the Bank should take into account t'i' attractiveness of the terms and conditions of its subloans relative to the (sub)loans available from other local sourcess (b) Bank's currency pooling system and one-sided designation of repayment currencies discourage potential subborrowers to borrow the funds due to the added administrative complexity and uncertainty; (c) In this kind of lending operation, Bank's flexibility Is Important in project Implementation; (d) Tinancial sector deregulation is an evolutionary process and needs to be Implemented with cares (e) Bank's sustained involvement over the years in the Institutional development and policy reforms has been effective. * 85 - SECOND IDUSTRIAL FINANCE PROJECT (LOAN 2571-0-RO & 2571-1-RO) Z Us PROJECT REVIEW PROM BORROWER'S PERSPECTIVE KOREA DEVELOPMENT BANK (EDB) The Review of the Proect 1. The Second Industrial Finance Project (the 6th IBID Loan) had fi- nanced mainly new and expansion projects in petrochemical, electric applianc- es, machinery, and textile industries in Korea from 1987 to 1989. The period was a turning point in the growth of Korea economy, in which the nation's overall economy recorded remarkable expansion in eeries mainly due to the brisk overseas demand. (a) The Second Industrfal Finance Project helped Korean enterprises gain competitiveness by financing them with relatively low long term interest rate. (b) The Second Finance Project helped the EDB meet the demand of the subborrowers by broadening the bank*s funding source. And this results in furthering the good relationship between the subborrowers and the bank. (c) Currency Pooling System was initially introduced to the First Industrial Finance Project. The system's objective, we presume was the equal distribution of currency risk among the total subborrowers and hedging the currency risk of the IBRD borrowings. However, it had adverse effects. The subborrowere were negatively exposed to the currency risk. With the growth of industries and financial institutions in Korea there were many subborrowers which tried to hedge their currency risk through forward transactions and other hedging methods. For such subborrowers the CPS was considered as an undesirable system. (d) Besides the subborrower's negative exposures to currency risk by CPS, IBRD fund had the other unique characteristics IBRD decided the Interest rate of a loan in connection with the cost of its borrowings for the last six monthe period prior to the commencement of such interest period. This did not Immediately reflect the current prevailing rate of fund in the market. In order to cover such aspect the 1DB took active measure of reducing the margin by one percent from July 1, 1986. This gave much help to Korean subborrowers. 2. In conclusion, we firmly believe that the Second Finance Project has made a contribution to the development of the Korean economy and its enterprises just like the previous five IBRD loans. - 87 - STERM CREDIT BAE RLB) A. Braluation of the lank a eformance 1. The total of US$112 million has been disbursed out of the original loan amount of US$118 million under Loan 2571-10, and the remaaing US$6 million has been cancelled. With the prepayment and repayment of US$62 million, outatanding balance of the loan stands at US$50 million as of June 12, 1992. 2. The prinary purpose of the Second Industrial Finance Project was to enhance the productivity of enterprises by expanding production facilities and replacing out-of-date equipments which were urgently required to strengthen International competitiveness. For that end IBRD funds made significant contribution to laying solid foundation for surplus economy in the latter part of 1980s by providing funds for capital iavestment to high-potential projects. Loan 2571-10 benefited 62 subborrowere and created almost 5,000 new jobs. About 81 percent of above-mentioned loan has been disbursed to the manufacturing sector and the remaining portions to non-manufacturing. 3. As shown in the sectoral and geographical distribution of subprojects, varied industrial sectors which range from food, textile and paper to chemicals and machinery has received the loan. Out of 62 beneficiarie., 51 are located in Seoul and Ryunggi area which reflects --- balanced regional development. B. Evaluation of ELB's erformance 4. Based on our scores of years experience In providing long-term installment and equipment loans to private enterprises, we made quite a contribution toward the successful carrying out of the respective projects as follow.t (a) A range of numerous and diverse private enterprise In various industries deemed to be in sound financial and operating status were selected for the available funds and their efficient distribution. Tight loan evaluations were placed on each subloans. We have played the role of selecting approving and authorizing high-potential projects, which resulted In serving the needs of small and medium-size fim. All of them, not to mention, were quality borrowers in torea planning their great leaps forward In search of market penetration and diversification. (b) Total financial services In connection with the IBRD 2571 loan enabled smooth completion of the concerned projects. Trade related services such as opening letters of credit enabled the firms to carry out the respective projects with success. (c) Timely provided working capital loans In connection with the IBD loan were another means of supporting the firms. - 88 - (d) After more than a decade of effecting ID loans, we began seeking ways to enlarge its scope of activities in order to meet the increasing demand for diversifted financial services from private firms. We extended the range of consulting services to include, among other things, the field of business cooperation and marketing research. C. Overall Evaluation of IBID Funds and Fture Coeration Between IBRD and ILR S. IBRD has played a major role in Korea's successful industrialisation by providing fledgling Korean firms with desperately needed equipment loan funds. Partly thanks to IBID's financial support, Korea achieved formidable economic growth which has acquired worldwide recognition. 6. However, we have witnessed several problems in the course of handling IBID loans. First, Korean subborrowers have experienced considerable losses through the foreign exchange risk exposure of CPS, which was the very reason of the massive prepayments on IBRD loans (esp. on CPS loans). In addition, subborrowers could not forecast the else of foreign exchange risk exposures because the portions of each currency in the Currency Pool could not reasonable be executed. 7. Secondly, it usually takes too much effort and time to correct errors which sometimes happen due to one party's fault. For instance, if incorrect payment amount is noticed to IBID on the due date, we have no choice but to wait at least for about six months, thus carrying the discrepancy between IBID balance and ours without appropriate adjustment. 8. Finally, one-sided designation of repayment currencies by IBID has caused subborrowers' complaints because it creates additional foreign exchange risk burden on subborrowers. 9. Korea has been in the position of beneficiary of IBD funds in order to stand on her own feet from the debris of Korean War. But now Korea has become a helping hand in the international community. This means that Korean financial institutions including ELB can joint IIRD's world-wide efforts to help developing nation's industrialisation. 10. XLB has taken a leading role in providing medium and long-term equipment and working capital for more than 20 years. Since it has started its business as the Korea Development Finance Corporation in 1967, and in this context, we are looking forward to the days when we can extend our accumlated know-how in long-term project financing for your world development programs. -89- PROJET CømLE=O REPR SECD IUEUSTRIAL FINANCE PROJECT (Loan 2571-0-KO and 2571-1-KO) EART M: STATISTICAL I RILTMOTION 1. Related Bank Loen. Len Ko. Tile Purpo~e Appsoval rfuC 1528 1.n Pinen.. KLB subtrojects 1986 Cloed ø22 XUBII Pinen.e KLD subproj «to 19 Clsed 1781 10,8 III Ftinance XLB subprojects 1971 Closed 0e Ls IV Pinan.. XI« subprojem» s 1978 Cloed 1804 Progrm toen Suppr dveo nt effrs 1978 Closed 1980 1Km Finanm. mm B eubproject 197 Closed 1146 KLB V Finen. #U subproje 1m Closed 1219 Program Loe» II Support deveopenI øfotes 1M76 Closed 1886 10K II Pinaen". KmB *ubprojeee 1176 Cloed 141 XLB VI PinI e a L » utprojenIe 197ø Cloed 1674 KmB III Pinn.. KB .ubprojaubs 1B76 Closed 1688 KLO VII PInan. KLaubprojects 1976 Closed 1982 løs VIII Finen.. KLO =ubproje~ts 190o Cloed 1988 KDO IV Pinen.. 1(B subproje"a 10 Cloed 8071 SAL Supp~i deveop.sn6 offt" 191 Closed 2215 8mm3 Pinene S l ubprojeøt and leahniesl eaiStane 19o2 Cloed L.« to lmI, L, O aend IPC 2369 Ind. Fi0ne Support ref"rai provids credit end trening 1om Cloed Le.G to na, KLO *nd KmE 2854 SAL II Rfor~ inl y, nergy & pubile se er effieiency 1918 C~osed 2515 SMJ Pt.... $1 aubprje s end leohuliel assiobenee 1016 Closed Loef to CNI a 8UlPC -90. 2. Proiect Timetable Item Date Planned Date Actual Identification Mission Harch/April 1984 March/April 1984 Preparation Mission JuneiJuly 1984 June/July 1984 Project Brief September 1984 November 1984 Appraisal Mission Ontober 1984 October 1984 Issues Paper November 1986 November 1984 Decision Memorandum November 1984 November 1984 Post-Appraisal Mission February 1985 March 1985 Loan Negotiations may 1985 April 1985 Board Approval June 1985 June 1985 Loan Signature September 1985 October 1985 Loan Effectiveness November 1985 December 1985 Loan Closing Ja September 1990 September 1990 Project Completion Ib December 1987 June 1988 L& Refers to L-ans 2571-0 and 2571-1. The Bank agreed in principle for a four year extension. though only on an annual basis, for the closing date for Loan 2571-2 - Technical Assistance Component. b According to Schedule 2 of the Loan Agreement the Project was expected to be completed by December 31, 1988. But Form 590 shows December 31, 1987 as the Completion Date, which was the last date of receiving subloan applications from XDB and zLB. i ] aa.aa-aa-aa-ail, jeI ¡I = i s, , , , ,, I, 5 b qw..ø...1.,.. si-a 1 1 11 4>1 :1;11¡ g1il i, Table 4.1 - -1 - - - --- - - - - - - - -- - - - A 8 gas M à a ss- aas - 0ohji ! -1. ¶ ¶ Ina . * e 8 - 2 . Sa .93- Table 4.2 Sectoral and Geoanblal DistribAtio of SWmats ULB Unit : '000 US ) Nuaber z Amount % A. Sub-sectoral Distribution 1. Mawfacturing : Food, beverage & tobacco 3 5 1,300 1 Textile, wearing apparel & leather 6 10 6,570 6 Paper, Paper products & printing 4 6 3,836 3 Chemicals & petroleum, coal, rubber 14 23 27,825 25 & plastic products Non-metallic mineral products 8 13 12.840 11 Basic metals 3 5 4.820 4 Metal products, machinery & products 9 14 18,830 17 Others 3 5 7,860 7 2. Non-manufacturing minig - - - - Transportation 2 3 6,027 5 Construction 8 13 9,194 9 Wholesale & retail - - - - Agriculture & Fisheries 2 3 13,039 12 T 0 T A L 62 100 111,941 100 B. Geographical Distribution Seoul city 45 72 93,165 83 Kyung-gi province 6 10 11,700 10 South Chungoheong province - - - - North Chungoheong province - - - - Kangwon province - - - - South Jeonra province - - - - North Jeonra province - - - - South Kyuagsang province - - - - North yugang province - - - - Pusan city 5 8 1,908 2 Daegu city - - - - Inchen city 6 10 51168 5 Cheu Province - - - - T 0 TAL 62 100 111,941 100 .94- Table 4.3 Page I of 2 - ga--- ---- - - - s ~ R 04 n leS S....aa i --- II SE §1 1 . - IJ i. - -- fi -I -- - - - - - 4 be4.2 Table 4.3 .agc 2 of 2 5 ø ... ... altg .****- -- ---- - - 3 "ia:" WTc 440t14 ---------- NEl-. i i Illlalacel- ,I EI <54I ~ 6-- 33 1 * 4 Q @ ee.fAmunt 1 Amoun~t 6 Mnunt M Aunt f Aitunt P mAnunt 1 anount ~ vsrwals 1 6 9 6 6 6 9 9 9 .mens Freign currmncy 6511 6071 833 861 7661 7831 1,1521 Domstic crrency 1,9029 2,1051 2,2101 2,0991 2,0451 2,9819 3,556 EIityInvestaants 1 489 131 2061 21 2851 1221 1621 S adsWad Debenture 6 661 609 1016 1186 3936 4031 4621 Total Approvals 2,6679 2,7856 3,350 3,080 1 3,489 4.095 1 5,332 istmurffiffnts 6 9 9 6 9 SLons Foreignocrrency a 641 1 607 9 833 9 861 9 766 9 736 9 1,152 1 DousticQ.urrmncy ~ 1.9026 2,1056 2,2106 2,0991 2,0459 2,8341 3,556 euity Invesutents 481 136 2069 29 2859 1229 1629 lnds an Debentures 1 661 60 101 118 3931 403 1 4626 Total Disbursemnts 9 2,6571 2,7856 3,350 3,080 l 3,489 1 4,0956 5,332 I IOutstandings 9 6 9 6 6 6 9 1 Lons Fori g urrmncy c 1,018 6 1.012 1 1,111 1 1,661 1 2,205 l 2,807 1 4,062 l omCstoOcrrency 1 5,896 6.4826 7,560 7,6439 8,2581 9,901 11,8706 quityIvestent/a 6 6051 0 600 7901 733 1,= 1,1731 1,3411 BondsadDebentur/a 6 2216 2166 3036 1,3159 106 l 683 l 1,022 l Total Outstaniings 9 7,740 6 8,310 6 9,764 1 11,352 11,599 6 14,564 1 18,295 1 IZssusd 6 1,466 2.1486 2,4409 1,4911 1,920 7666 1,2219 Outstaing 9 3,755 9 4,065 9 3,592 1 2,439 l 2,150 1 2,781 1 3,418 l Cover dasier A 6 2,7209 1,7846 1,255, 7939 - 6 - 6 - •99• T訪1織5。2 Page 1 ofZ ，螂騙綱響鬍環粈鑲粩他婉織，織騙騷纏纏翅細震縱親象變變遜編‘ 萬召；留留顫糅‘緘規賣矓規哉讓饒觀震綴規翅震露規珍為一禹驪，驪規’ 乎’一嗎｀.-..，州．’二州一個口．，奮盤－－一，，•審編 鹽：乎•－-－一－－一－---------－一－---------------------. 蘊’‘晝！ ·詹一墾一鑼一墾一壁一豐一壁量一邑一燮二”馴 「一方喜方一萬荻萬一萬痲萬一一萬薇寫萬一廈萬一萬痲頁一蘊萬萬寫蘊一奮一夜百萬寫一寫蔔’ ’引細縛‘也留縴鯀g專他藝撼膩響總舊藝‘藝‘嗯膩縛‘留緘膩華 ！摔細－－一一－-－一－一－－一－--－一－-----－一一一，,，一，-－一，一，--- I寫各編編編擊編細綢鳥舞織壇總震徑絕賺雜矓離纏親變涌聖矓0編編 ：·珍煙細編細編頗煩衍藝留驪寫藝權庭縴錘震壇翅藝咦•寫編庭滬鍵 他1‘補g神jg礦‘膩付闢‘騙鱸 .,．矓離規離規震規變織觀規規規視環莢覓震規莢界規規規變離規夜 劊：馴綺騙跑總震賽界鑼弓藝邑鑼縱籐界呂日•界•曇•藝必•潤規馴 誠凡戶卜一－-－一一－一－一一－-－一－一一－-----－一一一，一一一，一巒－－一巒一，& 一11屆；震離彎覓變荊規規離視廈覓視震員視界視貝變貝旦嘆薇視•視喂！ 華1.！惜l認舟邊雙霄織震震變覓遭購雜織荊規群絕夾總視‘馴奪屆屆視l 規―一么二二一一一二一一二一一二二二二一二二一：二二一一二一二一一一一一一一一三遞 登屆！二；矓規規規規離離究規規規咦規規矓織蘊規楓離舞彎離離徑徑搬徑買！ l-：個！“•••‘•界界露界邑界涌界界鳥絕舞異一界”寫‘！•網•擊； 編日，弟卜二－一亡二亡亡亡豐一f-－一亡二二亡一二二一二二二一二二二亡二一二一亡一二＝＝勿二亡煙 i-_＿上旦上＿三三邑莖三豐＿三＿_＿登豐登三＿豐三＿莖莖莖＿豐三莖三三＿三＿豐＿三豐二豐豐！ 饕―!，犢綴騷釁矓鋒翅輪掛騷．紼鸛攤i 廈I戶卜，一一一－－一一一一一－-----－一－一－－一－一，-－一一一于一巒巒巒仔亡巒方－ 廈―·獸礬鳥裊喜要豐驕蘿語棗雜并認轟騷蘿藝壅驕浴驕鵝魯藝馴 豐―必一必星上一一一一一一一二一一一土上二一二一二二二一一一一一一一一一一一一二一亡」 暑―】廈！蘿豐暑暑響磬豐磬擠蘿婪暑發讒蓬蘿曇擠蘿添磬華霄薯藝暴響鳥驕！ •一。，二．9 .9偶『“盧•二劍方•二“6．勵蔥 戶卜f－一于于巒甲于巒巒一巒－-－一吧甲－一－一豐甲一甲豐于巒一仕f亡亡豐于巒一亡一乞f亡方亡仕f仕亡豐亡界 ！喜！薯驕辟雜鬍婪環婦讒瞬箠箠哥量量爨驕蘿婪磬驕麥曆魯群藝鳥藝量， 細．••．•‘■•‘．••••．《•••．•••．•■•‘■••••••••口•－一’．••■．－一••••••••．••個■■•．••••••••••－綢•．••••．••■•．•••■••■•－－一一－••．戶•－ 寫 !:，。＿_．。。．曇，。。。＿_:！。：〕 :！言茸。靈。。望豐＿謬曇．蔓奮霎震！譽．廈，。薑萱氫壇二震。。。〔 嘗”！震10 111111 11磬曇11 11曇11。曇。11！重11畫I實111盞’ 星＿__＿二呈蠱蠱邑蠱且乞竺豐＿量旦三竺三丑＿竺豐＿邑竺呂呈莖邑乞豐三呈星更盒邑蠱邑三呂二； del dal Offil Øffil M.M l M.M l elm 36.10 l øm l l l W-ly l tilos l 1" l I.M.N l litim l Iffiffi i Iffim i Iløffi t 1.411» l 2.^* l i S-m-411 l 0-a I'm ekvi 4M l imi# i L" l IILM i Im l løjt l $m i I.M i 2N l lae i 2M.M 3"m i 42lm l øm i M.la l MM l Mw l Nels lam.ty i I.M.M I.m.m I.a.al 2sosel Iffi.o i mffl i men i 3.OM 2HIM mig min 48.mi Mw l 5M l l køl l " i i u* t 1 21.151 1 ~ kW fin b~ l IMI l mi JIM l 0 1 3nig l el 30.M l el nem l l affi l l 311.M l f~~ ~ l l l l l l j l i l i i l l »Jø Om l 39.321 4" l MJR i 4w11 l Mm l 414.m l M.M t G.M l l 4LM l 1~ $^9 l wim l $1411.01 4~ l 1^40 l 4L10 l &" l knial W.M i I §,an i l W~ o~ lWIMIUM I MÆ l 4,311.413 l MIG 1 4~ l 4.1Xm l kVM l 6.VM l kmib l i l w~ i l i l l i i l l l l i l 9.0 l 4M l 9.10 l M.* i " l ?*In $#m l IIW.m l Iffij» l MA21 miffi l I2A11314,1m1 $~1 l l 21.4* 11.4 l 11.6 øl* l "m l l t l l l l affil " I » I "An l » l " l w i eW l &021 oM l "A i l l 1~ li." l MJR l 119,91 løffi l I.MW l Iffi.m l l~ l 1~ 1 I.M.W l *mi l W.M l Min~ ~ 1 60.0 1 løffi l lZ.M l lMin l 1.111-me 1 1~ l 2.alm i M-MI 2JØM l 3M.1131 l 3MA l l Ikm** i øv %ml k* I4A111- i #.mi - i - l 9A l - l lOffi l 02,3N l l 1~ l l 219» 1 kW ~ ~ ~ 1 4-mm 1 ~ 1 ~ l 4»» l 4M.G i kolmi k»113 l koliffil tA" l 1 1.45.911 1 lim-401 l 11w ~ Ftý* i » I uj# 1 1~ 1 941 Mn l atm i ØRIM l 1.619 l mg l løffi l l 2.40.n l i $.nul i *~~~ l~ 13~1 4x16 l 3»ffi 1 4,19,01 Mw 1 4^6 l 3~ 1 5~ l MAI l l L2k1121 i SAW l l ~ W~ m= i " I - l Himi - l luffi l - l " l - l "ko i tæ l l IGJM i l møl i ~~ timlwe elm i exi Om 9,91 21m ILM l aØ l 99.M sm mig i 1 914# l i Min j U~ t*1108 LM-Ø Il~ f~ ilmm I.Ikol L" l 1~ kmA k*m i lI.mm 1 10.9.01 " Liditm 18.MIM i MIG l 9411.8 1 t~ l MIG l *AAI i lilffiffi i 11,4H,8 i «.V i sløffi i CUW MLen Wul 9,91 191#11 ^61 9,4111 9.61 IM.4171 l l i %W&gdk~~ i alm l » l 2NJE i " l MAN 1 2~ 1 silffi l 9.3" l ^Ni ami aal 41t41 Tal em mkal M.M l *.M l Mm l lM.M i I.M.911 i I.O.INI I.IN.a i týe,2n i 1~ ~ l l l l l l l i l % 9%jm l 1x431 111.10 l sø l 2." l XO i Iffi.3Y l MAI i I.MM i fup~ 14inin l S.IM i 3AO l Lullit i I.INA l 2j6112 l lxm l 2,1M l Wým l WIM l 2.411M i l udt~ l kmm 13.15,6 1 kam l 4.ØM l tame i i $,ffi.* l IXA4 l kmAD l 2,9B-lul l kw-nt i bCL t*lan Ir elm III MI" f« 13.fikø l M.rå l 4~ l l l l l l l Lwistm am" 111"Ja Imle *Mia l 10.26» l sAw l OMA l t~ l "AN l 12.ffiffi l 14,1mAn i tAmx l i 21.ex i 。101- hb加5。3 •司•開•個口■■細•••．•••，■■•．•••．，••劍•，開’••■，&．•頗•用間•司••••悶，•間口•．間••‘啊•，■目．•••編．•••啊．•一‘•口•．•••－．間••．•••■•．．••．••．－•，■•’•．•••’•••••••－個．，•．•••－-．陶 騙．震荊荊颼乓環很黃規視離濺究變究規震離彎離規震震雙規 錄：緘‘11《i膩‘留膩緘緘緘留織召翅‘’一妒留規滅i留 弟一萬丁一一日i寫寫寫一寫藕認寫面痲一一一一萬寫寫寫荔石一寫一寫寫面一寫寫馴 劊症‘緘‘舊婦“&g膩‘留‘藝藝婦’&“症留‘馴 ．一－一－一－－一－----－一－一－－一－一－－一一－一－---－一－---－一－鬥 ．馴鞏暴襲鼕暑鳥簍襲婪量暑翁華語蠱獸藝齋魯彎轎審 鑰汗一一一－一－－一騙•一－-－一－-－一一－-----－一－--－一－－一－-－一－- ；寫邊’牌總總擊華騙蘇騙親細舞統驪縱遷邊縱嗡鰓綢榦紀視義 ，劊懸頂••界寫粈狗購也蔥細，露藝鳥悲州”&，包”,, !,；覓荊禹離究觀規規離變覓翅荊夜死變震夜邇究甩賽界界覓 ；個l誠頗啊留留叔細付頗婉鰓·結響彎勾•雙畸‘’馮鑰自細一購― 斗卜－－一－-－一－-－一－------－一一－一一－------－。－一一－-－一－& ！夜籐邊變饞離寫織還遜變覓震離變實覓覓規輪搜雜梁梁餐震覓 ；鄙壅糁j瀘藝補g擘。露症痲療緘留訂鉉‘i＇討‘藝討e叫 ---－•－一－‘一。－－一－－一－----－一一一－一－---.--－一－－一一－---－吋 二齋鞘纖糁編舞勰細糅為鳥藝憂總擊群辟壯綱汗認馮爍”絕！ 日，豐洶‘寫客絡驪叮抓也抓喪曰搜掬寫騙勵劉‘紹象劉鑄鑄． 為騙－－一一－一－-－一－---－一－－一一－一－------－一。－一－一－一－－編 …藝婦啟糅搜谷寫細藝獸藝發總藝賽絕鳥益座攤幼辭三C黍群籐i 員l!．響’j騙‘j留緘i審d婦C留妒jdd留膩留“河膩留d&ji 嗡總江·，．一－一•奮一禿”個申為‘胤－－一‘祇一一i 二I卜一鬥鬥－一細－---------－一一爭一一－一－一－-------－一一一”---－一一哺 辭1.:＿朧，也驕細二眾記江。＝，。觔痳鶴它。。L．。也絀，以I 個屆必．騙·屆禺侃總零華斗露坦零為也婦馴壯召討霹排擊朧名劊一痲I 酌居；e．必網森細嘛細柑馮柯抓留自搜購病鴉自擺爾’卸義念貍細要 田I當袖‘：〕宮絕細合合宮寫總宮自含瀾g曰合皂g牌悶蠶紛歸刈霄霎l 酒•！1．颯：么頗‘編細‘留呵．‘齋留胡總g細曾留編留嘛勰必也響”為煙 禹！·〔奮；騙叢織添逐境螂自編細造細賽細群蓄汪群駕擊婦發登騙三I 蒲I;d｝膩織膩〞緬悶ij寫討if留dCe留d祠，j緘留i留！ 云I‘細卜一“·－-－一－---------－一一－---－一－--－一一－一－－一一－一吋 里I：一；雙：用甘斗卸應劍屆齣名雙紛翁寥纏疲為舞斗義認彎罐必與梁審I 憑i響·j膩‘婦留i屹礦留jf召妝妒‘面留屹留”一抓蘑留爾闖響l 望一擭鑰忽徑搜鴦紹織馮也跚纏惡觀細群B授荔授g劉曰l l任；必衍舊緘j‘抓．膩留g頗抓頗面留留寫矚．編瞬疲向”狗I ：細汗－.．一－--“•－•－-----－一－-－一－-----------－·”一－--－一吋 ～言他認云瀆煙曆黑化以焜發也歸號亡二焜顱h煙煩爐以也也之方1總總總。雲胡盆I 三I糁！皺離規雙挺甩馳視觀雜糅很規視震徒號鵝絨凡飛規規痲視界I ;l濺！辭頁‘頗甘留緘“訂蘊忽顫奮‘留必羈露‘細屆盛齋•瀉I 邑寫廈I挪細細屆I&．拙掛必I t爾屆審屆竺•勿個I肥鰓細巒逐d州I 做―I_＿寫韁澀煙·霧偶應口11煙豐覓織．豐驕濾屆― ．騷三召二I斤遞日a鴉。蘊S馮昌居I鐘豐•騷召呈細。d＿鬥靈•I 屋l他露I日S日弓S個•禹二倡日丑二里辭發日才曰e。煙日．興巒他煙州個骨al 一騙－--．矗•－．矗•－－•目〝－---－一－一－一．昌•一•矗•－--－一一－-－一一一一－一－一－一‘ 一取似。 奮跑b細5。心 , ！「一召T匹召匹g藝奮面面藝召一可一日日寫面面一日萬面面一日一？審可面一日“面一奮面面日寫一i& 邊審a】頃讓嘎權纏規麾權寫莖，規一－－一一一一一一一一一磚嗡華一‘•一一 廈·戶二么一三三：豐二二二二一二＿二＿一＿____＿一＿______________________ ’。二！- ••必■■．口■個圈曰．口•’■■•個口•．•■■‘•••糅•••••．．•．•■•．•．•••■．•開■．••．．■•．口•．■••．•••喝•••．•■•個•■．．•馴••．■一．■••．口中•■•■•．•’•■．翅•■•．■•．‘■．．••．．■■•．閑■．•••．■•．口口．••．口•．細■•．•．•．團•‘•••．•口．■ ，二i旦旦里蠱旦蠱旦弓旦蠱旦豐豐添忠造造悲忠悲豐’他忽他豐鑿叢麩澀澀豐他方 1戶‘”••“居碼膩”柑“& 【i,！藝鑼籐賽藝界鑼旦藝弓蔥蔆，忽忽；當盞忽莽莽‘他生豐盤莖他他忽泵他他。 ’一！個I邑界界鑼弓界賽邑粈專’甚－---－一一’----－一 戶盪一’留煩‘留．&.&.& d口糅口口•個口口•唱口•勵劍口勵d口口自口．••口口口•■•．劍•••口．•‘■•．••口．開口■個口自‘■口•．．口•．•■自纏•■•糅■口自•團．•個口口••••‘口•口自•■．■國•．■•口．■■•．■■■■．•■■‘向••••••••••．•••‘口口勵唱口•‘••■．■••．．••．自口•翻■．•■•■‘■•••口•口••••個口•唱口 ;&!｝騷北壯弱．路騷‘&,&&,,&:：。：:::;::;;:, ！亂1 djjd嗡g補＇補緘j •．••■•．••‘口口．．••••．甲月．■■．．目．•■••．••．口口．．口•．•••．••．•■．•••■．••細••．．■．••■，d■■••．••．■■•••••■．•細••．■•．‘■•••．口•‘開■．•••••••．•••．■■•．•■．••■．•••••••••••綢■．.．•由．■•••••••．•■•’．•‘■••．甲．．• .,l規規視規矓覓遺雜震離變規糁乏乏盡：’斗寫；斗‘丰望森斗：斗：：觀斗華， 邊擠i一，d&Jdg。結＇婦＇ 。．!1寫！透這廈矓規規規矓織矓讓斗絮乏乏霄徑韋：群斗’:：盤望發色認萬雲驕華 禹，.&,d&ji&＇婦＇補‘j 鑒―｝一不驪瓖鑲哥囊一“&‘一：菲一；一；巧一；一：一＊;：菲一荊 膩I!，么必二三二二二二二二二一：：二＿一＿__＿一＿_________＿一＿_______＿一＿__ l-_＿上蠱上蠱邑壟壟壟邊豐豐＿＿二二輩二＿乞二二＿二＿二二二三＿乞＿二＿三二乞丘二＿二＿ 馴：廈，雜驢雜嬝讒讒鵝讓蘿語“&&&&；二”&:&::&&&”認 香！;，訕必一三二一豐二二二二一二二＿_______________________________ 纏】！’喜！裊蘿藝畏蘿騷添雜•蘿發騷：添，：。，，乏，,,,,：谷婪，t.‘盤，, 審l－一：平革二一乞二二，二一亡二一一一一一一一一一一一一一一一一一一一一一一一一一一一一一一二－ 著―-―喜！蓬韻讒震驕驕蘿盔蘿縫驕：:&;&&；為：&;&;”一’&& 忽―!，他g么：:，三：二二二一：：一一一一一一一＿________________________ 認―i-!―蘿蘿婪哥盔荔添藝•嬝婦盔：,&5。，,：。，莽，，委：。。””鑒，,& 賈l〞I瞭‘I&ij&j＇補 一，L------------－一－一－一一～-－一－一一－－一～-－一一一一－-－一－一一－一一－ }，織！,．馨，_,.＿翁；．撾綠；。。。亂 :,，擺朧l__!!.1_.；矓＿晝11鄴謝l矓排I曇， I&：雞I驗“。11歸！號龍；i無i新矓11！雜 遲：___：呈星一重莖一＿一～莖里星盔蠱盔二呈二盔邑旦莖亙盔二旦且生呈二三二二二旦邑三三三一乞 File name: PCR-2 Domestic Currency Resource Mobilization KIDB - ----------- (in won million) Interest Rates(%) Amount Source I Amount I Term I Haturityl- ---. Committed/ I (years) To KOO Onlendins disbursed I Outstanding/& 1985 Economic Development Fund 208,268 36 2020 5-9 6 7.5-10.0 208,268 1,182.804 National Investment Fund 156,665 10 logo 10.0 10.s-11.5 156,565 1,463,549 Petroleum Stabilization Fund 61.643 8 2003 8.6-9.6 10.0 61,843 209.724 Tourism Development Fund 18,450 7 1992 8.D 10.0 18,460 64,681 Special industry Supporting Fundl 11,326 1 5 1 1990 1 0 1 1.0 1 11.326 1 27,426 Energy Rationalization Fund 532 8 1993 8.6 10.0 $32 3,268 Industrial finance debentures 614,665 6 1990 8.9-12.8 10.0-11.5 614,666 1,017,385 1986 Economic Development Fund 226,221 36 2021 6-9.5 7.6-10.0 226,221 861,525 National Investment Fund 189,891 10 1902 10.0 10.5-11.6 189,601 1. 139,390 Patrolem Stabilization Fund 68,877 8 2003 8.5-9.6 5.0-10.0 $8,871 283.503 Tourism Development Fund 25.188 7 1903 8.0 10.0 26, lU 69,462 Special Industry Supporting Fundl 10,678 1 5 1 1991 1 0 1 1.0 1 10,678 1 30.898 1 Energy Rationalization Fund 626 8 1993 8.6 10.0 626 2,663 Industrial finance debentures 760,000 5 1992 9.3-12.7 10.0-11.5 750,000 1.390,066 1987 Economic Development Fund 211,937 36 2022 6-9.5 1.6-10.0 211.931 1,060,428 National Investment Fund 1981608 13 2017 10-10.5 10.5-11.0 198,608 1,265.540 Petroleum Stabilization Fund 101,381 8 1991 3.6-9.5 6-10.0 107,381 215,266 Tourism Development Fund 18,232 1 1994 8.0-8.5 10.0 18,232 75,928 Special Industry Supporting Fundl 11,131 1 6 1 1992 1 0 1 1.0 1 11,731 1 36,104 1 Energy Rationalization Fund 20 a log? 8.6 10.0 28 11516 Industrial Finance debentures $50,000 6 1992 9.3-12.7 10.0-11.5 860,000 1.895.509 L I I I Interest Rates() I Amount I Source I Amount I Ter Maturity- I Conunitted/ I I I I (years) I ( To KOB I Onlending I disbursed I Outstanding/a I I teasI I-I-I-I4I-- - -I I ---- I I II III I Economic Development Fund I 221,275 35 I 2023 5-9. 5.5-10.0 ..e,276 1,138,164 I National Investment Fund I 138,685 10 l198 10-10.5 10.5-11.0 136,685 1.12,828 I Petroleum Stabilization Fund ( 102,197 ( 8 1996 3.5-8.5 5-10.0 102,197 253.343 I Tourism Development Fund *I 20,475 I 8 1996 8.0-8. 10.0 20,475 81,802 | Special Industry Supporting FundI 8,122 1 6 1 1093 1 0 1 1.0 1 8,122 1 23,22 1 I Energy Rationalization Fund I 28 I 8 I 19t 8.5 10.0 28 773 I Industrial Development fund I 5,888 I 8 .1996 5.5-6.0 6.5-7.0 61.68 5,68 I Industrial Finance debentures 1.080,049 5 1993 11.5-12.2 11.5-12.2 1,080,049 2,490,164 1989 I I ( 1 ---- I I IIII I I Economic Development Fund I 152,728 I 35 2024 -9.5 5.5-10.0 112,728 1,386,745 I National Investment Fund I 84,025 1 10 I 1999 10.0 10.5 84,025 1,025,54 I Petroleum Stabilization Fund I 115,883 I 8o97 3.8-8.5 5-10.0 115,683 310,131 I Tourism Development Fund I 22,542 I 8o91 9.0-9.5 10.5-11.0 22,42 87,388 I Special Industry Supporting Fundl 15,228 1 8 1 1994 1 0 1.0 15,228 1 21,318 Energy Rationalization Fund I 0 8 I8.5 10.0 0 444 Industrial Development fund I 4,443 I 8 I 1997 .5-6.0 0.5-7.0 4.443 8,581 I Industrial Finance debentures 11,610,876 I 1994 11.-12.2 1.0-13.0 1610,876 3,021,173 1990 I I I If I -- I I I IIf Economic Development Fund I 304,629 I 35 I 202 5-9.5 5.5-10.0 304,629 1,650,198 I National Investment Fund I 51,900 1 10 I 2000 10.0 10.5 51,900 861,47 I Tourism Development Fund I 26,100 I 8 19s 8.5 9.0-10.0 26,100 71,668 | Special Industry Supporting Fundl 18,587 I S 1 1995 1 0 1 1.0 1 18,587 1 45,905 1 Energy Rationalization Fund I 58 I 8 1998 1.-8.5 3.0-10.0 502 I Petroleum Stabilization Fund I 58,001 10 2000 3.5-8.5 5.0-10.0 8,001 368,489 Industrial Finance debentures 1 2,200,000 I 5 1 2005 111.1912.21 13.29-13.11 2,200,000 1 3,860.400 1 I 1991 I I I IIf I Economic Development Fund I 248,536 1 35 2026 1 5-9.5 5.5-10.0 248,536 1,841,934 I National Investment Fund I 21,229 ( 10 I 2001 10.0 10.5 21229 647,903 I Tourism Development Fund .1 31,852 1 8 I I Special Industry Supporting Fundl 19,436 S 1 1996 1 0 1 1.0 1 19,436 1 53,836 1 Energy Rationalization Fund I 0 I 8 1999 1.5-8.5 3.0-10.0 0 273 1 ( Petroleum Stabilization Fund 28,928 I 10 2001 3.5-8.5 5.0-10.0 28,928 333,526 I Industrial Finance debentures I 4,358,000 I 2006 111-12.21 13.29-13.11 4,358,000 1 6,345,200 1 e _ _ __.L_ __ a_ _ I I I __ __ _ I _ _ _- -~ I r-－一一一一一一一不一一一一一一一；一―gT－萬一1.: ―奮曆•6常寫•·常夠豐靈，1 Bi: 1亂法一’二日一三任g認盡l鳥i霎 l配籐99斗忿g、露雙！,！二 I戶弓登¥寫I翁！工 1&－一。。玲一―古01 ,1．之：名變壯，屆l雩奮l ·編I杳號認勵絮露呂貪！靈可！ :！之變豐露徊毽寫藝i寫：i 。―會奮蓄言奮奮’寫1豐鳥l :1變《《《痲痲瑟巒囉鑒審I。聖聖― 一！晉呂露甘言言鑒露留常：1界。亡― g！戶各各訕容台寫bb計，,！喜豐翁― :-.1”呂“,&，牙邑19必發！ 亡訕＿____________＿一＿一竺一“--－一屹竺邊 編｝！離劊―, A！二一：言望合，：。。1三濤森―I呂 一j莽必必必6必勵•吋一戶面雙＿才！l豐 :!‘茹‘&__＿號一壁一一＿＿三＿_＿土＿莖壟」―, 尸一一－--－一一－一一－一一一一一一一一一一一一一一一一一一一不一么一1-g !.：奮訓―荔 .-,”·；·“；浮‘-―邑 r一一一－一一一一－－一一一一一一一一－一一一－一－一－一一一一T一審一濺―露 ！生S要要奮謬謬S｝參11盔 ；搜變仕拱弋毽彎鬱：召！l萬 唱O啊•，k,｀唱口唱口奮〕擘颼膩j亡11開． ｝一二一二一豐一豐一二一二二－-－一二弓一平一二一l―鑿 ！可三無讓曾寫不實真！,,!―藝 ―編濫斗，，呈．，毚常常鳥萬寫蠶曾寫【三呂11喜 I戶變。讓，學華飾，‘次袱。古盈鳥：當i石黑！I舊 f oj一蠻．-－一含神亂日中變11 汗二二－--------－一二。－--－一一二一上一翁―& i文斗寫寫斗寫◆翁遼！g喜！l杳 ！胞讒寫呂寮召論g鑒！可甚―勵• ：甲。謬常常＋B寥！亂二1 ；一‘一“一“一‘一“一“一婪一｝一馴 !----------------------－一三一中 l露．。震露望名，：。。·1審喜．1 〔丑＿＿鉑＿_＿三＿_＿三＿＿三三＿三三＿___＿二＿_＿三＿二二二翼― 計’。巴！ 〕奮當露蓬忌答藝；日露容―震量三‘ ‘斤尸才7r計才rfr「言，弓• ，•“,o叫“‘。”&‘戶’: •－-------------－一一－-----－一，一一，－一‘,－一： ,，。：··…；：獸 由一頗鳥么書 C神1叩閱一，-------－一，”一”,,----－一，,--－一，”一，-－一 9’右．T中工 •辦， r一一一－-－一－一－-------－一－-----------－一－一－--－一• -_＿留＿。。亡霎0_，。。，_＿曾 l奮寥買方e鑼鉉舛”•巒寫雩震寫，•’弓 l編＿騙鹽發蠻一變方〔口籐一貿網””·發 唱『，1戶一響更1一里己．〔『神，＿『，_＿• 日妒中喝．露一開（fa亡•開臘．&O＿祖個口憎‘→ 盧0•．屆口規中個甲怔矗一平e，〔『牌•勵1露9 I河”要必一豐計翁召呂權蓄。寫；登 l_＿發甲巒徑p邸『鴃才•·1; I•讓〔寧0•，『，．•‘．自■d,‘三 馬瞥。．莖變分O哺奮。〕 g要召r界呂”遞：計 卜一一一么一一一一一一一二一巴一一一一一一一一一一一三一一一一一一一一一一‘ !＿嚼t事＿ 汗騙寫世多口＿豐戶•‘一啊勵一‘口。才 留，、、多諍兀、戶闢中騙蝨一，輪，k妒魚申；，齋 籐、｀一，細吋，輪方h屆、輪戲，留必｀｀、｀，•斤 倡參’‘•禿胛多夕、要觔妒0•觔肆巒甲 奮，&，嗚戶唱豐嗚，、，&0劍，，輪，輪、｀.‘亡t. 言••h彎屆仔瞭、｀必必中｀豐O !,C•·變”•。■。•＿唱口．‘神d鬱‘震’勵 !，露一馴f, 「一亡一亡－一斤一亡一喜－一二－一亡一亡一亡一不面面萬蘿 薑齋露蠻d肥他夕一騙9綢肥曰挪•肥口C編露．騷醫 藝哺勵，變露勞儲中，‘一吵嚇一唱庫露．＿尸， I’中’中鳥認才勺彎徑中更戶．．〝開•電才呼吋一可‘U 擘OC才豐中雙－屆認口婦個曰紹革”由必•••C訪O口O重•jg州• 曆0OC〕9髡髡．-－二kg妒0.000發一二二• i髡黠整9。屆讓不〕＿O唱讓口0 0.j kk！巒e_: 諍奮才C卸石〕屆認p gtt名才口O屆謬審口，O 哥〔〔讓屆認騙〕；認，C 取－-----------－一晝－---------------－一必二二二－ !n呈C．州 要嗎‘驕留煙 矛吵戶→蠻，一呼吋巒·曰邊g 藝必電才唱j 19彎雙望煙口一口婦中90萬•‘『，p ！計gr于汗計巒尸于斤P尸9&;．言 ！一0••叫。。。0．。。0二莽 1喊 ：烽•崤 ：俗． 【一，．一乏乏 C＿二＿二＿旦＿＿二＿＿二二＿______＿二＿＿二＿＿二＿＿二＿＿二．＿二二＿ !‘。：;:：。：:：變；，實 ―畫豐藝華喜龍藝藝．審華華！鳥 他輩一中”。• ：尸尸電，: •中，畸訪中口一尸r.．一”必 ―臘里叮巢絨，綺’然縱董；養蠶 〔乎•。••‘斗 喜＿啊 .f-r－尸戶尸尸尸尸尸f－尸尸Oj ：審B留饕騙‘露衫細審惡屆丰當 。申中中命，令，～申‘－一么， 者斤r rr計計斤訕戶戶rr蘇 勵觔吋輪帕馱中魚必爭曲留‘劉）帖軸輪囑 ！騙鰍驕妒妒驕編妒幼驕驕 ；。，,’彎‘ ,e卹 :000二0, !,,，·，弓 露！ 卜－‘•．••．．•‘一－••－－•••－••．自•••．.-．•．••．••．,.~－•．&－•■．•••••－--－•••開．•．-..－•．-－一－ ！一～霍＿_＿。二＿,，霤 侈斗OU觔必喝鳥‘輪00·O毛侮么》 自森b必中必帖O巨•心O自09么斤為 ，一O唱你叫00 000 00 Oe .--－••．一－一－--－•．－一一－-－一一－一－----------－一－－一－f. :：。：;:.：屆：：。．!，。；瘀 一O必騵輪0000騙0 00’廾i必 .-－一，－一－一－一一－一－一－－一～-－一－一一－一一一－一一－一－---－一了 合g :：·：。，二：:，。，，·暴藝－ ~h今O，中O命000 C汗o才婦，d ,’雪屹朋工 ．卯！, t &-;，蔔矓藝，，統：，雲細暮！ ―寫響呂呂馨蒼審蠢三馨喜綰g蠶l載i ―江藝當當彝曇g叢翁釁霧于兮倡叢―喜― l___＿日＿___＿二＿莖＿莖＿三三鹽＿三＿二＿訌＿二＿量＿整＿呈＿〔 -，。，.---..！盒。I l認》〕〕變變變變認狀！審參： }S盔5 5 55庭言S芝｝靈：! ----－一‘&&:i&,; r二二一亡兀二一亡－－一－---------－一亡－一不茲獸 ―才惡《發露才寫《梁雲痲編梁痲《嗡發編痲嗡l呂遼細！ ―雙•仁：.C藝藝；藝C多營笞曹舛―邑合：I I-.．戶：勰，．戶合忿戶名名呂呂h尸呂呂hl：另當！ l召露h呂名認呂h名留b尸牙尸呂呂h尸，尸．呂I華認于’ 屹丘聖二＿韭聖上＿一”＿二＿_＿二＿___＿二＿二＿二豐旦三J -！痲蠶合i l豐造響造響藝藝乞響響馴饕參‘ 1．勾 ―呂，。呂；,.；·。：歹！ I。，－一，_；彥！ 藝露、｀、、邊b卹輩邸n〕｀｀悶屆尸l 醒、｀一吋、、｀、、｀、｀吵方｀萬C召 ！《《壯壯壁疋露〈變豐！江i 豐紹。畫鬱口口鬱、hg婦，｀豐斤： I一”一’黑’‘馴’} ．祖•〔讓祖•『•寫I 言．中認．馴唱；留 易口勵O煙辭中盔．目妒哺： 簪舉中．尸吵•｀中劍〕斗勵：O震乏 。乏吋口•口兀O個；口必中巒言．面 f．口擘，俗Q唱口C〕夕‘O。，已 •。口認讓．、細：奮瘁口 ，粈臼•巒．聘： 斗一一一一一一一一一一一？一，一二一二一，一？一，一一一二一么一二：〔 ，『•『•『•『•f&f•『•『•『•『•，O由， ｝藝邊藝藝讓話藝言藝華：菲’ 不勵二二中，勵勾瘁今。牌 麗．.．一騙必騙論••．h論。 日吋卜，粩論戲丰騵唱網騙論吋魚必鰍認由！ ！。•”•唱網唱網”•”,&. ‘••．•．.－••．••••開．•．．•．•••．•口．••．••．..．•目．•••．•．‘■■．•••．‘•一•口．.．•••．••．．•．•．．•．劍．•• ..．•••‘b•••－－•■．•■．-－必 !i，實‘ {______________＿二＿________________＿上＿!！〔 l為翻參h ―•，。。。。。。一。。叫！戶•：; ！。。，龍 i總結忠名名呂雲乏狀容蠶當；杳兮 ‘言多。C•hd ,．當叮中唱一O!& 叫 州馴 萬日 留為 牌勰 寫必’露藝！總縣計’計•珍計騙蔥合’物I卹I合擊’t〔bs LI,L&0計會藝計牌計’t〔C令嗎之’•露L〔。細降神臼為鉀償口啄州馴驟j，膩計 髯掬鉀祠激州州鼠輪暹萬j C嗎’電購1•寥’〔驢O計•1 j6’【瞭網．I織，I么叭肱為r•1；。觔胛 神糁”6f了0”籐乙唱’L奮。俗電，t碼，&t！必然’6電01&b魷助開魷執•明 馴悶’珍網險’•藝50”合切必’必I6L唔雲t必計’tt幼9&9鬍期啊雜榭抽開鰓101 卻。”f才腳購”1 1 55計”5 CO中分’擊之LO•C‘•之C中C,O蔥藝蔥5闐’S！寫舛觔糾網l居飼冷絮， 馴嗡’f才鋇嘛’唱1 fgt’擊之馴軍擊’9蔥乙661&6之6C寫IC”〔之。C 595&5 Cl琴驛觔躡卜柑 奮 e鋼酈．t，緊胎幼甲網l禹償統州 ”之’開奮’常囉才•騷斗”h〔h6才奮嗎計’Lt遞俗黠幼騙．才鬍C寫卜之S’•鰓6L•S•’開f擊你驢寥’r磚露留必1．闢口神以鳥鯽似•。州馴驟勵騙， 顱仰O&0鑒珍．09壯I之O絲•f戲I州關露電屆颼載州曦n 電Lt’江乙蔥，tL&l黠！認6&f霍牌96&C6驕6．、珍計I才寫’C常跚計L必，o必駕期關鉀攔開 566’命〔離”唱驕之’t嗎碼蔥，o•蔥L【9”參9卜gC”〔計91•”ICO計•”蔥華騙點威婉鰓抽開開l離 .OL之”L舊I”糁t必乏卹藝一卸侈石fl偶L&f飩．計•必細’C留必露計0合，C合9！•〔I”•Ctt針中’！•11必做膩霹朧蘿婦囑亂》 歸已S”為俗’!j才嗎。”6寫90計寫鸚蔥’6•之寥gt牌•‘計釁L煙寫參C”驕蘊辭‘59&CC雲寥魷b’必O露tg舊’翁觔偽卜W .1蠶線，跑．中露•視卹髯備U麒終細 俗才騙’露細華7，甲奮‘7•’曆l寧辟101蘿鬍計勿f露藝心，’才C釁L十必藝’蓄之S，以州”編I計俗爾t讓．徑藝亂會戲l枕邊｀IV州協囑肖鰓h勸 0 00•藝露06縫••血煙挪習才個鴉 叫細’。l•fIO嗚！I才O饞斗l榭【州．觔籐抽州絨劊隨劉州東胤添 寥烯’嗎牌必9嗡之95必’L擊勵91&6•鬍O’之•嗡9必C擊’寥以蕨東糾袖開細日•唱 e6I&96f•t6o&！『6賺gSL•必t•才唱！•’6計I•藝。’tl之l群qs必【9’蔥5駕期劇闕亂•開個亂珍 廬鳥藝”嗎奮擊計記審’t7勵！邢C‘《f嘛皂騙t唱’6鳥囉徑‘0 .t購t電之‘S擊乙t必’之，．開柑州鵝卜州 州瞭奪唱r•唁調馴川梁點曬」驪I朧•。嘛飾 才C辟’才合糁’7f霄I&,et口’擊必r’『計【露勻才e鬍，驢5’勵藝計9’藝擊bs&t鱸藝’騷驕騙計‘r‘擊9&9鰓St6&！啊t’們俗‘t鸛‘！答唔觔，藝藝t鳥魷’奪。州神雞1｀朧．馴響鵝為邊蠶細號離 嗚霧f’計【S彎t!’弱I!！〔’計0露t必計’60疋壯01今9藝蔥必9之’之•個計•必’•f騙，劉以蓬開甩澗憫 h寫計’10•’賺9計S&t開·6計蔥’Z•gC之卜申515寥露鬍‘蔥。鬍留55&09〔卜〔•”手tt以廉網然冷開馴擊婦 I彎計’寥即’暱L《寫．症寫CO&f6唱寫電9’唱寥物乏’〔幼’唱，電唱’t編〔6&I【藝針t’唱Lj‘勺嗎寫6t”唱騷69，個b電鬍計•◆．SBf”號！9•鬍劉廉劇亂屆細森森濘 么•t&S叨’煙O藝‘’騷電『擊’，個寫t計9&!9t6’計令0’唱乙卜9&！電6•‘記9藝釁6計’I寫to”擊勵藝必雲電：必CI’之0卜〔卜瞭．1 LLC’計【之919開鈴瀾離卜柑 一編…細．．一自．二，--．緣二卹響一念．■二 鵬織奮露‘馴，唱調觔蠶開州『l配網j補抽取》．〕I驟細圈卹 ．一皓一妒，•－一勵－一勵－-..--－一“煙－．。一•申•••，,..-．一••，妒•目－--－一中．••一餐一奉一••－一•。一留申．。歸州．-- 】物向斤，啊剎曉膩劇開《闢1州騙頗騰嗡用二開馳州州唱東么倘視網甲電網刃陶頂馴，響議渥織補網丫•網 :&-－··－··一，&&,-－一“奮一，·•’···一＇－一”•，-．一，-－一，一，-－·…”,，一〞一由一”，一 .“唱”bhl6珍61驢韶b中L恥！勺既露S恥• 細 〕”66,‘•6,，開。，,,，鄉’o‘。馴口•螂 州闈細1離‘縱以韋州壯螂闢『總W初寫觀扯 l i: 啊 州馴 •O 嚼 州 焜辭。，二，．。，,．。．、，:，。二。、。：:．。：,．。。．,:，。‘,,，二，.,,:,.0．。．｀。，。．…，. &”•．f’飾‘開•計奮I《’嗎訌’l計啊L計必”嗎卹•神夜”L〔l俗露ffs’〔，卜卹’丰藝寫【必’〔C寫’群觔鳥卜ly 奪且開f州為I•嘛」鬍州添•’•騷Ih馴S」東U作荊•中，’肢••IL •遞露”f口鬱‘擊藝！【”之寫lb計。I磚’電必啊留C壯’‘蔥6計6計．！牌幼膩’rf，鳥C•．馴•取．1｀脾甲h 11細黝卜L個． tt,”計響•才C才l寫’61曆6遝才之t’釁合才I計十L．才寥•O•C幼”卜I必騙I髯’騰細嗎州爛 唱鬍總申I&l&11調馴S獨個鰓擊攝，發覃鳥．縱翁馮論亂珍縱寧I償參犢 抑計’f6必’I擊L鳥煙才，’之t才”珍必L〔恥蓄’，嗡膩0寥t IC’才合•計L俗必必’計96必l&t盤啼計合◆19•hl妝’•｀I黝中叫l•h彎言輪I口擊 6才之”奮孑寫，寫離瞬為’,L•’細‘L才、tC’購5計露，瞭為合’合••必L〔C&&C 91闐’常f If•’C可寫’州劍編州潔 細織••l’籐l吋馴駕嗡1•綿荊．臘寥〝．馴細鑰跑亂》．廖11騙唱陶馳I -．•”.&,&-..－一，--.－一‘.．一•一，.--....－一，,-.．一細．.-－…”. j仲討劇細•啊t勵細劇黝唁網江織啊•hl啊讓織購馴輩潔數纖闢專州寫馴』絀細網細啄網江織闢馴州權網 .1**l為‘,&&.,6I‘•．”。”61‘•．• 發 • 鳥了鳥’61歸’‘騷叩•”認，才俗”亂唯露‘f俗了計’L•計•”啼《藝’才I6L’作計發才’9f0’了〔I啼’f，、之’IOL’•O•奮”計OLL’歸總奮’•卹E’藝，I弘’to!’•總計‘&r。網沼齡•｀亂丫潔t．州黝I以：細， 亂69’藝俗擊叩卜’S之1 f6•”S·合•f&6，才必才”響01鬍開’6纏I蝕闕萬．I抽州」細”二矯萬韋一為勻’•j 中69’『間”l計騷•’•他h蔥t勰’09計LLg&OLCL【L&0騷S擊侮L”必6C計籐必’00f掬·I卜妝馴補艮響寫川馴唱叭”神 鳥鈴’66寫’才紹I口”合！曾’藝歸釁盧寺9騙•”•6參•’O之必6t留．t〔L〔fL&6必計唱俗9&t必合瀾開邇啊寫勵論細I•• 瞬俗’6擊寫”t，寫才’疋關t&l計0”了t寫0‘之閱〔’總唔’l才C6’才合計6&OLLg計9&19•了’俗tLg〔C’•。fo&.t鬍擊C〔’露ff翁’露‘計【鬍•髯以】州亂•州啊亂廖 。，7籐’&l&”才計1華’才嫵‘&.，『•’才跚”•’71。擊’6Li&I賺鬍S&l擊•馴”騷0牌才．9&l&11”〔S必l、S&1 If藝’。fSg卜C&l之略霄’俗卜計奮S•髯‘州觔鷓鳥作 嗡口閱斤lh為•吵雜騙，1 It•開馴卜召唱•屆 I鳥，&L鷓”•7鬍l．計才、’f•參藝’I。才0’•th十”購計“必馳L鬍釁’gL馳擊t6零州’C購口L雲b 96計’才才歸計物’•黠鬍痲’必徑珍必俗馳，•h二中離」具鯽，網It鈴ht啊勵東， 闖；驢瞥馮業州潔龍織j、I 啊計，t擊之。露，計•1 6L,’•C•·籐鬍〔’籐勵昤州l續珍待1騙奪1．勵•‘11：。寧W 跚，，擊•．擊7才•。，&I離•，症蔥肥‘黝露f5L’釁L6鬍0’計十之L俗計’鬍6 660&Zb開劃際馴作I憫 遞亂9’。fL他開’遞6計！露以’合鬍之．之0&6t•6偽’之11心藝居’蠶L必騙‘．〔擊I髯•懿瀾弟壯個獸1.1 •b『’計彎，0了•I，糰’j露LO發疋必奮。◆‘必騙留寫l〔C俗’外•認哈I寫•0’計露I計6唱’鬍Of&C細留寫弘’9忿•6L•儲划劇網遞“馳氣寧 •喊！‘才口，‘才l、霄渠’l庭牌C6之9計L’〔朋物！Otr&6卜1 15•6L。’蠶•l才乙960’關I•卜1 70卜‘C煙珍I“•開州細際卜W& “開州．t，弋州騙寫I｀網．I補冷亂•M珍l個冷•• 露磚乍劇鰍。為•闖鯽，臉擊網華伸購審作．叫1袖細申卜婦喲】織朧馴州啄叫二抽馳劊細。啊】織馴劇奮權叫 I&,．•煙騷‘黠•t．牌h響牌論。．1必仰6騷，•開6•擊馳，．中 Kurva Imma Tera Cs-r41 L 04j&k Prolve-ted Manste Skeeto odla mållitm tim l 1987 19M 1989 C"b hink drpoltitls 49.922 59.101 49.995 14.928 77. am 120.821 205. 667 marbr'tabli neratiljru 188.441 121.461 111.943 144.543 148.415 448.815 760. 1114 short trirg 10449 la. an 23.484 16.880 49.868 63.008 226.608 159.890 Cell-font portion at 4~ a 122. 65 1 330.917 136.846 414. "2 6 15. 526 418.111 718.178 4rbräturcu 4-%$ : A11094nre for Icssarx 1.464 5.118 18.140 11.858 14.914 11.910 IG.414 t*nyttaiwrs' arreptans-tt Ofabilltv 9.598 45641 11.884 15.689 28.880 39.484 154.491 årt-reräl Interrät i-ervIv4hle a 35.714 54.411 21.295 52. m. 52.135 26.604 110.464 atbe-rs Ichtat.M 511.774 699.162 660.919 800.250 912.596 1.319.151 2. 295. el l rerremcy Iumets 4 delarntaren 528.944 646.896 879.278 1.251.378. 1.551.218 2.134.031 1.896.811 Forrigm c-serreac:y 1494n:& 576.171 669.485 741.748 781.690 611.318 198.341 1.164.646 0#418147 lnvr.t%LD#-neo 11.774 12.298 11.525 25.367 38.167 88.092 196.304 Lens : Ailo*4*c-a for kosses 8.191 14. 6" 22.534 26.858 29.868 43.9% 59.148 1~9 : Carrent portion of 10490 122.651 118. 917 316.846 414.952 615.526 478.132 710.118 debont,aren Lagt kra telstomrsn, arrrpLlnte 25.500 27.598 68.009 105.880 128.848 618.516 1.744.403 11,1b111t1 1404 -asxrt%%(11CL) a okherig 9.650 11.655 12.191 14.835 49.å45 99.186 11(1.167 Tal-el ~cen 1.144.818 1.113.319 2. 0 16. 498 2.396.718 2.665.978 4. 519. 216 8.564.046 gisrea .ata Trre Ctedit hank trojaertd ILe ut aa e Sheets (Cuati med) Unit: Milii.. Vom . 1985 1986 1987 1988 1989 t1 90 1991 ga.t illilu tal CakrIlt lea rosis * a0.000 16.000 60.00 70.000 90. 000 250.000 400.000 !lort ler* harreigs 9.700 9.111 5.000 6.000 7.000 121.609 200.511 Prrigu srrery drposilts 161.800 275.120 271.610 Corsent porLION of kere debt 267.408 135.012 426.155 474.952 615.526 80..169 1.797.89 Ac,epUaes nO*tnI0ding 9.500 7.00 12.000 15.000 20.000 39.4 154.597 -ar$ Ieød Interest y.pble 19.009 20.413 20.009 16.606 16.816 38.422 §r.2r2 Other rurrst 11.1iitis 19 13.779 18.116 60.690 60.000 17.947 167.466 sittaIt 155. 656 442.055 705.080 918. 368 1.082. 952 1.293.811 2.81S. 707 oca.a carrenry borrowis 1.451 2.200 71.022 257.457 319.204 551.045 527.567 forrign curreacy borrowings 590.215 692.750 591.276 417.890 368.450 747.211 1.085.076 . ILB debenteres : Detstanding uf Kl deb"nture 568.854 823.658 891.181 983.912 1.222.082 1.r01.321 1.560.269 .enn : Untaortied dicolet. 54.423 59.095 53.281 92.223 111.013 77.786 225.648 Aereted Interest 34.248 22.238 60.178 82.130 88.550 114.146 222.985 lxss : Corrent portion af tera delit 267.408 135.012 426.155 474.952 615.526 804.369 1.797.859 LOs term .eptafet oetslasdles 25.500 27.500 68.000 105.000 120.000 610.516 1.745.401 derred sveramre herfits 2.500 3.162 3.450 5.200 7.000 10.000 11.019 Tat4l llåbuiIl#iex 1.256.613 1.619.456 1.914.751 2.222.782 2.481.639 3.967.937 7.946.549 Igeity Share rapit 50.000 50.006 50.000 75.000 75.000 172.000 172.000 ddit'iosa l paid is rapital 37.000 37.000 238.000 218.800 lOtalsed rarølsan 18.217 41.861 51.747 61.916 72.331 140.518 206.707 sI.t.al 88.217 93.861 101.747 171.916 184.111 51.118 6i.507 Total liIablitieu I o1y .144.810 1.711.119 2.016.498 2.196.718 2.665.970 4.519.2it 8.64.046 Kort.ti .ng Tvs 0 Credit Ipå*k At tisål ftålasrfthrets "bit : iila *s 1985 .986 5987 1988 1989 -.990 311 c1rrea t * l0.41 156.061 cAsh e bank d e 4a l Aa 61.598 52.206 .76.496 7.150 1479 27.9% 118.244 8ir&utable smee:rIies 119.613 213.847 155.86 2570.30 498.369 745.954 941.111 Skos ere neanas 2.857 19.925 34.659 68.243 112.826 215.74 891.911 C err ent p ortio f loans I 116.291 411.414 462.477 461.314 729.000 .517.281 2.872.11% d rle mature n L.as :AlIletacr for lossen 4.057 8.090 8.820 60.700 53.910 20.500 • 11.146 Castuners' a taarr 'e labire t . 6.451 8.085 60.971 17.955 46.152 650.706 111.290 Aetrrmed itrest reeivale 8 61.796 29.411 65.954 85.54? 15.494 55.946 176.269 utbern ubtot 598.791 726.020 797.593 940. 307 I.68.72 2. 560.082 8.022.017 Daseati. curreary Ioans a de1en46r.s 785,877 816.612 948.178 1.234.791 1.808.016 2.287. 400 2.842.812 Farig :rr.ncy inaan 385.964 560.236 729.551 666.003 670.095 995.534 1.181.807 li9uily Iuwustuents 10.298 11,525 21.367 32.695 80.455 112.674 224.257 L.eas : Allouaare lur Ioan.es 9.103 58.110 22.458 27.694 33.970 64.930 84.830 1.ess: Currunt. parlou ef loans I 116.291 451.434 462.477 465.334 729.000 827.504 6.088.714 * debsuturen I.as~ Lerm castaøeru ' arrpLause 25. 487 44. 721 90.823 149. 596 513. 749 I. 101.4519 I. Ir.?. 990 Fixed .IasetISar t) A t.heru 8.455 8.926 9.279 12.621 24,.579 76. 3% 82. 2691 Tastai uses 1.461.476 6.739.358 2.113.818 2.546.987 3.922.219 6.441.556 50.247.648 Korea Laos Term Credit Bank Actual Balance Sheets (Continued) unit :Milii. one 1985 1986. 1987 1988 1989 1990 1991 Liabilities Carrest liabilities Uposits i8.725 51.724 52.559 105.118 167.021 301.900 462.488 Short-term borrowings 2.615 5.770 5.725 11.826 6.625 198,049 301.021 Pereigs carreacy depeaits 274.92 394.824 442.931 614.855 955.780 Current porties of term debt 278.1223 5$.538 471.089 496.483 875.743 1.9.0937 2.799.816 Acceptaeas outstandieg 6.65( 8.085 10.971 17.955 46.152 50.706 131.290 Accrued Interest parable 17,492 21.843 22.022 22.428 27.812 59.188 63.289 Other curreat liabilities 39.110 18.46 71.144 75.430 166.021 228.358 1.149.172 S"btotal $73.415 457.568 988.432 1.124.064 1.730.305 2. 952.093 5.862.856 Domestic currency borroeles 2.267 13.090 149.431 295.259 441.767 578.755 573.071 Foreis curreacy borrowlss 672.214 756.416 479.648 259.372 167.680 200.161 276.683 RLO debentures : Dotstasdes of KL8 debenture 596.1329 755.226 865.862 1.010.588 1.56.044 2.224.768 3.930.613 Less : sasortised discount 56.036 57.253 71.613 69.675 62,157. 126.205 175.961 . Accrued Iterest 35.195 25.131 55.544 88,04 114.449 134.815 189.410 Less : Current portion of tern debt 270.222 35I.538 . .471.089 496.483 873.743 1.389.037 2.799.815 Los-term acceptances oetstasdies 25.487 44.723 90.823 149.596 533.749 1.313.539 1.867.990 Accrued severasce benefits 1.642 3.043 3.986 5.641 6.716 8.935 11.248 v;:;##uwazu xanausn.ass ausuuasa assausmasax s ummzzaa usa=zvoen axm2ua Total liabilities 1,373.091 1,644.346 2.011.024 2.366.666 3.416.870 5.887.814 9.636.095 Share capital 50.600 50.000 50.000 75.080 172.000 172.000 172.000 Additional paid I capital 37.000 258.840 23800 238.800 Retained earnlegs 38.385 44.972 52.794 . 68.321 94.569 144.527 200.752 Subtotal 88.385 .94.972 112.794 180.321 505.369 555.327 611.552 WWWWM~ssage apanes:ages agaWsassa ZataWEBaea Zasd ag4.~ *aSonssta Msa 4 a Total ilabilities & equity 1.461.476 1.739.318 2.113.818 2.546.987 3.922.219 6.443.151 10.247.647 .k forea Log Ter* Credit kank Projected -e--- -tateet Det : million fon 1985 . 1986 1981 1988 199 . 1990 1991 lico.e lättrest es Boa* d debemteres Oomestic cerrescy : Short-tera laus 1.956 2.228 3.010 4.700 6.300 17.763 29.900 Logs-torp toas 11.159 14.350 97.913 129.686 166.040 224.495 387,913 foreiga cerrency loss 51.308 66.284 .68.691 68.624 63.690 1.330 99.104 Subtotal 124.423 142.862 169.614 203.010 236.030 313.588 516.917 Coultnet fees 1.115 1.856 1.374 1.830 1.050 8.373 29.824 Dividend 2.5771 2.510 2.940 3.100 3.960 24.241 22.050 tocem fro reserve (und 13.961 30.635 27.130 22.020 18.210 52.848 77.590 Iaom* from 1X traasaeto otberg 6.308 5.615 4,480 6.350 6.390 16.561 35.976 Total revemme 147.984 183.478 205.538 236.310 265.640 415.611 682.317 Epemses Isterest*oi borrowls ~e osita 1.550 1.77 3.350 4.270 5.600 15.330 25.460 11.8 debestur : 64.548 83.506 Interest om debentere 64.890 55.680 57.000 103.890 191.122 Amortkation of discouet 33.125 50.170 67.670 60.695 138.886 Preign cerreacy borro gsa *50.885 58.319 59.916 60.690 55.810 59.931 80.588 Other borrowls 819 792 3.740 15.120 21.150 44.822 47.770 Subtotal 11.02 . k144.394 165.621 185.930 207.230 284.668 483.826 Cousltent ebarges 1.443 1.313 520 160 0 70 41.325 0£ A espenses 6.153 7.926 7.980 10.280 12.800 20.840 29.831 Provision for losses 2.450 7.270 6.970 7.122 6.594 6.478 25.883 Other expenses - 5.363 *7.396 6.122 9.656 11.650 28.118 14.160 Total expesses 133.011 168.299 186.613 213.148 238.270 350.174 595.025 Iococe before lecome tan 14.973 15.179 18.925 23.162 27.370 65.437 87.292 Provision tor Incode tasa 4.500 4.700 7.150 9.020 10.100 9.982 7.766 lit Income 10.473 10.479 11.75 14.142 17.270 55.455 79.526 Korea Loss Term Credit Bask Actual lacom Statemseats Usit : Million loas 1985 1986 1987 1988 1989 1990 1991 lacee Interest ea loase & debeatures Boestle curreacy : Short-tern leans * .788 2.569 3.537 6.190 14.788 23.113 37.657 Loss-terp loaas 72.567 78.797 I1.56 127.446 169.547 324.994 488.185 Forelso currency loans 57.692 12.146 74.887 64.530 68.461 78.105 93.074 Subtotal 132.047 153.512 178.780 198.166 252.796 426.212 618.316 CosItsest fees 1.263 1,077 1.882 2.530 10.092 16.953 54.058 DIvidead 2.133 2.706 2.832 3.806 5.654 7.054 9.131 laces. fre reserve rad 14.400 26.682 25.532 28,438 38.261 25.732 53.200 Incoe fros FI transaction A others 6.323 9.587 6.364 10.828 18.391 5.925 39.059 Total revenue 156.174 193.564 215.390 324.768 325.194 481.876 773.764 LA apeases Interest a berrowless : Deposits 1.637 2.157 2.925 5.282 9.000 14.521 22.663 EL debeature : Interest on debeature 40.312 54.006 57.811 61.835 79.056 137.856 153.590 Asortisation of discount 25.687 26.737 38.981 46.230 S1.943 77.829 232.031 Forelso currency borrowinss 54.826 65.885 64.276 52.886 54.823 62.703 79.122 Other borrowless 752 464 4.968 16.706 31.740 44.377 49.719 Subtotal 123.214 149,249 168. 961 182.939 226.562 337.286 537.125 Comsltment charses . 1.291 1.193 1.016 282 67 90 489 8 & A expeases 6.799 6.641 8.075 10.055 15.046 24.629 31.615 ProvisIon for losses 4.129 13.080 81700 7.222 9.486 1 S.058 19.908 Other expeases 6.361 7.995 7.349 12.457 28.773 42.121 99.210 ------- ------ ------- -------- -------..------------ ------- Total expeases 141.794 178.164 194.101 212.955 279.934 421.176 688.39f a. Icose before Iacone taxes 14.380 15.400 21,289 30.813 45.260 60.700 85.425 Provisiom for faces. taxes 4.100 4.000 8.950 10.700 12.700 S.500 12.000 1.t laces. 10.280 11.400 12.39 28.11 32.560 55.200 73.425 - 1160- Table 6.6 C. Rail hupsimsad a ura,iaUu i.. 51.11 to 1l8 1157 1855 185 IU 185 1. lim fontwa t m an & dåtre/ AVD. mmrB lana&Jb. perkfolo 2 12.35 11.35 11.21 11.02 11.14 11.03 12.1. 2. ~ of te t /A . t t 11.15 10.42 10.08 9.&Z 9.81 9.15 11.14 3. latrisrd 1 1.21 0.7 1.15 1.m 1.3 1. 1 4. l=ft fnu lom / AM. 1 lm sr t 9.83 10.15 9.35 9.5 9.51 9.5 9.4 S. Cat of X m debt / An. FX tos de t 940 8.74 8.00 83 82 8 845 6. Interent sd 0.43 1.41 1.35 1.35 1 0 1.02 7. ln fra Namcur e toru s a s &