SEOUL - SOUTH Korea plans to set up a 20 trillion won (S$22.08 billion) fund to help banks raise their capital base and access cash during the credit crisis, the financial watchdog said on Thursday.

The move will ensure banks 'will be prepared for possible losses that they could incur from a prolonged economic slowdown and restructuring (of businesses)', the Financial Services Commission (FSC) said.

It said the central Bank of Korea is expected to contribute up to 10 trillion won through loans, while the state-run Korea Development Bank will contribute two trillion and the rest would come from institutional and other investors.

The central bank said separately it is discussing details of the plan with the FSC, and its monetary policy committee would make a final decision at an upcoming meeting.

The FSC said the fund, which would be created in January and operate throughout 2009, would help bring down market interest rates because banks will be able to utilise loans from the central bank.

It would also improve banks' asset-soundness and thus increase their ability to help small and medium-size enterprises and export-oriented businesses.

Banks that draw on the fund would be urged to cut costs and increase support to small businesses.

The watchdog announced the plan in a policy report to President Lee Myung Bak.

Banks are struggling to bolster their capital adequacy ratios as the slowing economy and a credit squeeze increase the amount of bad loans. This in turn means they have less money to lend to businesses.

In a separate report to Mr Lee, the Ministry of Strategy and Finance vowed to cut taxes and reduce red tape in the new year to fuel consumption and business activities.

The ministry promised a 30 per cent cut in the excise tax on autos as part of the measures, following a sharp fall in sales.

It called for the sale of inessential state-owned property to raise funds to help small and medium-sized firms and the underprivileged. Such sales could generate 3-4 trillion won, the ministry estimated.

Seoul predicts growth will fall to three percent next year as exports slow down and domestic consumption stays weak. The central bank forecasts two per cent. -- AFP