Yonhap reported that South Korean banks and non bank financial institutions will weed out 2 ailing companies and reschedule debts at 14 others to keep potential defaults from rattling the slumping economy.

Korea Federation of Banks said that the restructuring drive will force the financial firms, mostly banks, to put aside about KRW 2.23 trillion in additional loan loss reserves, which will likely have only a limited impact on their financial health.

KFB said in a statement that "Local creditor financial firms decided to end support to two companies and put 11 builders and three shipbuilders under a bank initiated debt rescheduling program."

KFB said that the two companies, Daeju Construction Co and C&Heavy Industries Co, will be urged to file for court protection or survive on their own. It added that creditor financial institutions will help 14 companies, including mid sized builder Keangnam Enterprises, normalize their business by rescheduling their debts.

KFB said that local lenders will start the process of reviewing credit risks at other ailing construction firms and shipyards soon. They plan to supply cash to companies that are suffering from a temporary liquidity crunch.

The move comes as many small and mid sized construction firms and shipbuilders have been feeling the pinch of the global financial crisis, with some facing a severe liquidity squeeze.

Analysts have warned that a possible bankruptcy chain reaction will undermine the soundness of the banking sector, dealing a harsh blow to the whole economy.

(Sourced from www.yonhapnews.co.kr)