VIII. FINANCING Banking system The banking system in Korea comprises 14 nationwide commercial banks, 10 regional banks (one in each of Korea's 10 provinces), branches of 52 foreign banks, and six "specialized" banks. Directed and supervised by the Government, the specialized banks were originally created in the 1960s to provide funds to particular sectors where credit was insufficient, but have recently expanded into commercial banking. The five largest Korean commercial banks with their assets (less acceptances and guarantees) are as follows: Korea First Bank (17.3 billion won), Cho Hung bank (15.9 billion won), Commercial Bank of Korea (15.8 billion won), Hanil Bank (15.0 billion won), and Seoul Trust Bank (11.9 billion won). General financing availability The government exercises tight control over its domestic credit markets, often with the goal of channeling financing to priority sectors. Beginning in the 1970s, the government has provided funds at subsidized interest rates, called "policy loans," to small business, the agriculture sector, and other priority segments of the economy. In some instances, banks have been carrying non-performing policy loans on their books for many years. Credit ceilings on loans to the 30 largest business conglomerates are now in effect and banks are encouraged to channel a percentage to small- and medium-sized businesses. Distortions in credit allocations due to government controls have resulted in high levels of non-performing loans in the banking system; according to official statistics, such loans comprise about three percent of total bank loans, although industry estimates place the percentage as high as ten percent. Medium and short term credit is available from Korean as well as foreign banks, and through the issuance of debentures. Credit, however, is often in short supply, and foreign firms must compete for limited funds with domestic companies, which generally have better access to local funding. Foreign banks also operate under government restrictions which limit their access to won funding and therefore their ability to fill the credit needs of their customers. Debentures are an alternate, albeit expensive source of financing. Long-term debt is available from the Korea Development Bank and the Korea Long-Term Credit Bank, but only for high priority industries and funding is in short supply. Offshore loans are generally not permitted; however, in July 1993 the Korean government authorized offshore borrowing for certain firms offering high technology products and services. In May 1994 the government announced plans to allow all manufacturing firms to obtain loans from offshore. In June 1993, the Kim Administration announced a five-year financial sector reform program. The program proposes loosening foreign exchange and capital controls, eliminating government credit schemes, and continuing the deregulation of interest rates. In keeping with this proposal, last year the Korea government announced continued deregulatory foreign exchange reform to take place beginning October 1, 1993. In November 1993, controls on interest rates on loans as well as on time deposits with maturities over two years were removed when the second stage of a four-stage interest rate deregulation program was implemented. The first stage was implemented in November 1991. During his election campaign, President Kim said that he would implement a "real-name" financial system, the purpose of which would be to combat corruption, since fictitious names were being used by bank account holders to evade taxes or shelter illicit funds. In August 1993, Kim held true to his campaign pledge and announced that effective October 12, 1993, false names may no longer be used in financial transactions. As a result of this change, bank accounts held under false names have largely been eliminated, although accounts held under borrowed names are still prevalent. How to finance/methods of payment With strict government controls on interest rates and capital inflows as well as constraints on the growth of the money supply, the Korean financial system is perennially hard-pressed to meet the demand for won. Foreign companies in a start-up operation with a Korean partner often invest capital for the venture while their partner makes an investment in kind, i.e., land or facilities, as the Korean equity. Joint venture companies and foreign firms usually work with branches of foreign banks that have special albeit limited funds designated for local currency financing of such enterprises. Potential sources of financing include about a dozen commercial banks, regional banks and specialized banks including the Korea Development Bank (under the jurisdiction of the Ministry of Finance, serving as an intermediary for channeling government funds and foreign loans to industry), the Korea Long-Term Credit Bank, the National Agricultural Cooperative Federation which emphasizes service to the agricultural sector, the Industrial Bank of Korea, Citizens National Bank, Korea Housing Bank, and the Export-Import Bank of Korea. These specialized banks are controlled by the government and are designed to meet the needs of specific sectors of the economy. For the most part, countertrade requirements are confined to the defense industry sector. A company can freely repatriate capital and profits if the Ministry of Finance (MOF) has approved its investment application outlining the company's intent to do so. The embassy is not aware of any problems or complaints from U.S. companies operating in Korea in this regard. There are three principal methods of importing with Korea's own foreign exchange: (1) Letters of Credit, (2) Documents against Acceptance (D/A) and (3) Documents against Payment (D/P). D/A is a form of extended credit in which the importer makes no payment for the goods until the date called for in the credit; however, he may clear the goods from customs prior to payment. D/P is the same as D/A except that the importer canot clear the goods from customs prior to payment. The methods used under Korea's foreign exchange control regulations follow universal commercial practice. Imports on deferred payment terms D/A and usance L/C terms of payments are allowed only for (1) commodities that are not subject to specific commercial duties having tariff rate of 10 percent or less, and (2) crude oil, light oil, and heavy oil. Deferred payment terms are valid only up to 60 days (120 days for export use). The only exceptions to this limit are 30 days for procurement from nearby sources requiring sailing times of not more than 10 days (i.e. Japan, Hong Kong, Taiwan, and the Philippines). Foreign exchange controls Proposed foreign remittances must be approved at the time investment approval is sought. Once approved, remittances are guaranteed. When higher royalties or payments over an extended period of time are proposed as part of a technology licensing agreement, both the agreement and projected royalties must be approved by a foreign exchange bank or the Ministry of Finance. In most cases approval is automatic. The Ministry of Finance strictly regulates the Korean foreign exchange market under the Foreign Exchange Control Act (FECA) and attendant regulations. The FECA governs all aspects of the foreign exchange system, including foreign exchange transactions and holdings. The Bank of Korea plays a secondary role. In 1991, Korea replaced its "positive" system of foreign exchange controls with a "negative" system, under which transactions are allowed to take place if not specifically prohibited. Recent changes have permitted limited short-term offshore financing, short-term intracompany loans for high technology manufacturers, working capital increases without FCIA (Foreign Capital Inducement Act) restriction, and equity increases due to preferred stock issues and sale of existing stock. An important step toward full liberalization of foreign exchange transactions occurred in October 1993 when the government raised the limit on import transactions that can be settled in won, and eased underlying documentation requirements on certain forward transactions in foreign exchange. Serious restrictions remain, however, in the areas of offshore financing and deferred payments for imports. Conversion of the national currency, the won, into foreign currencies for certain international transactions such as the import of goods and services is possible with the permission of the Bank of Korea or an authorized foreign exchange bank. Korean residents may purchase up to $5,000 or its equivalent in another currency to make donations to foreign charities or to meet expenses in connection with foreign travel. For longer stays abroad, up to the equivalent of $10,000 may be purchased, in addition to smaller amounts to meet associated expenses. In May 1994 the Ministry of Finance announced plans to authorize Korean residents to hold up to $50,000 in foreign currency in domestic accounts and up to $20,000 in overseas accounts. However, the Korean won is generally not accepted outside of Korea. The external value of the won is managed by the Bank of Korea, which allows it to float daily within a limited band against a basket of hard currencies. As a reference price, the Bank of Korea uses the previous day's weighted average of won-dollar interbank transactions. A foreign firm that invests under the terms of the FCIA is guaranteed unlimited remittances as long as a foreign exchange bank confirms its ability to undertake the transactions. An audited financial statement must be made available to the foreign exchange bank. To withdraw capital, a stock valuation report issued by a recognized securities company or the Korea Appraisal Board must also be presented. Foreign companies not investing under the FCIA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. Export financing/insurance (bilateral/multilateral/local) Since a 1991 determination under the workers rights provisions (Section 23lA) of the Foreign Assistance act, the Overseas Private Investment Corporation (OPIC) has refrained from writing policies under its insurance programs for companies making new investments in Korea. Coverage issued prior to this determination is still in force. As OPIC has never had to cover claims for expropriation, political risk or currency inconvertibility, lack of OPIC coverage is not regarded as a serious obstacle to U.S. investors. Korea has been a member of the Multilateral Investment Guarantee Agency since November 1987.