South Korean Banks Resist Expanding Loans to Smaller Firms Amid Economic Slump

Strategic Insights -

Despite government calls to provide much-needed liquidity to struggling small and medium enterprises (SMEs), South Korean banks have shown reluctance to increase loans to these firms. Instead, they are opting to expand home-backed loans, which have maintained an upward trend as banks seek to minimize risks and capitalize on rising housing prices. This has raised concerns about a possible asset bubble and has left SMEs struggling to access financing, hindering their ability to grow and contribute to economic recovery.

Key Takeaways:

  • Loans to smaller firms extended by 18 local banks increased by a mere 220 billion won (US$176 million) on-month to 438.8 trillion won in July, according to industry sources.
  • Home-backed loans maintained an upward trend, with outstanding bank mortgage loans amounting to 257.8 trillion won, up 3.4 trillion won from a month earlier, by the end of July.
  • Local banks' home-backed loans expanded by 3.5 trillion won in June, the fastest growth in more than two years, driven by low borrowing costs and rising housing prices.
  • Experts suggest that the government needs to step in to provide funds for promising SMEs, as banks' reluctance to lend is hindering economic recovery.
  • Korean banks are caught between expanding lending to SMEs and maintaining financial soundness by lowering bad loan ratios.
  • The government has urged local banks to provide liquidity to SMEs, but they are instead increasing home-backed loans to minimize risks.

Statistics:

  • 438.8 trillion won: loans to smaller firms extended by 18 local banks in July.
  • 220 billion won: on-month increase in loans to smaller firms in July.
  • 257.8 trillion won: outstanding bank mortgage loans by the end of July.
  • 3.4 trillion won: month-over-month increase in outstanding mortgage loans.
  • 3.5 trillion won: growth in home-backed loans in June, the fastest in more than two years.
  • 1.1 trillion won: increase in lending to SMEs in June.
  • 2-3 trillion won: monthly average increase in lending to SMEs between January and May.
  • 18: number of local banks that reported data on loans to smaller firms.

Sources:

  • Asia Pulse, "South Korean banks resist expanding loans to smaller firms amid economic slump".
  • Yonhap, "Experts suggest gov't needs to step in to provide funds for promising SMEs".