The head of South Korea‘s financial watchdog called on local banks Tuesday to take preemptive action for an overhaul of financially troubled companies to head off any fallout from possible collapses.



The government has been pushing to eliminate highly indebted and unprofitable companies, dubbed “zombie companies,” from the market as local banks and other financial institutions have been struggling from mounting bad corporate loans.



“External risks, such as concerns over a Chinese slowdown and an imminent U.S. rate hike, have been looming large,” Financial Supervisory Service (FSS) Gov. Zhin Woong-seob said in a breakfast meeting with local bank chiefs in Seoul.



“In order to prepare for uncertainties at home and abroad, the most important thing is to take on preemptive measures like carrying out effective restructuring and putting aside sufficient loan-loss provisions.”



The Financial Services Commission (FSC), the top financial market governing body, and the FSS have asked local banks to tighten their corporate loan screening system and clean out bad debts in order to improve the balance sheets of creditor banks.



“It is important to single out such ailing companies through precise screening,” said Zhin. “By so doing, we can force marginal companies out of the market and let financial resources move in a virtuous cycle.”



Insiders warn that the rising number of ailing firms and mounting corporate debt could lead to a series of bankruptcies, much like during the 1997 Asian financial crisis.



According to market data, out of 628 listed companies excluding financial firms, 34.9 percent failed to make sufficient profit to pay down the principal on their debt, up from 24.7 percent in 2010. (Yonhap)