prosecution-KEB raid

SEOUL, March 19 (Yonhap) -- Prosecutors on Tuesday raided the headquarters of Korea Exchange Bank (KEB) to investigate allegations that it deliberately raised lending rates for smaller firms to rake in profits totaling over 18 billion won (US$16.2 million).

A team of some 10 prosecutors and police investigators seized digital files and documents at the bank's head office in central Seoul, according to KEB and prosecution sources.

Allegations have been raised that some 290 KEB branches nationwide, under the instruction from the headquarters, intentionally hiked interest rates on loans extended to small and medium enterprises (SMEs) from 2006-2009, as claimed by the Financial Supervisory Service (FSS), South Korea's financial regulator.

The regulator's preliminary inspection on KEB found that it had applied such an overcharged lending rate for 6,308 loan contracts, and made excessive profits worth a total of 18.1 billion won over the cited three years, the FSS said.

It has been alleged that KEB executives coerced their branches into raising lending rates if they fell short of meeting their so-called respective profit target ratio.

The probe is expected to spark heated public criticism as the lender had been owned by U.S. buyout fund Lone Star Funds during that time, before Hana Financial Group -- Korea's No. 3 banking group -- acquired KEB in early 2012.

Lone Star Funds' ownership of KEB had spurred constant debate and hostile sentiment since the U.S. firm was paid out high dividends, which some market watchers claimed were excessive.

According to FSS data, KEB doled out a total of 1.79 trillion won in dividends to its former largest American shareholder over eight times between February 2007 and July 2011.

Earlier this month, the FSS imposed a disciplinary sanction against the lender in connection with the irregular lending practice. The watchdog also ordered KEB to reimburse the overcharged interest to the affected SMEs.

Prosecutors are expected to put their focus on finding out whether Yun Yong-ro, the current KEB chief, had any prior knowledge about the illegal practice and stayed ignorant of it.

The probe comes as a huge blow to KEB, as it will soon be delisted from the local stock market, after its shareholders agreed to sell their holdings to its new controlling stakeholder Hana Financial, through a share-swap plan which will give Hana full ownership of KEB.

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