Bank loans to SMEs in Korea surge on new rule to promote corporate loans

2019.09.09 11:43:23 | 2019.09.09 13:57:30

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Bank lending to small- and medium-sized enterprises in South Korea surged nearly 30 trillion won ($25 billion) over a year on new regulations aimed to increase funding for the smaller business sector and contain household loans.

The outstanding balance in SME loans at the country’s five major lenders – KB Kookmin, Shinhan, KEB Hana, Woori, and NH Nonghyup – stood at 434.05 trillion won as of the end of August, up 29.03 trillion won from a year ago, according to financial industry sources on Sunday.

In contrast, loan balance for large corporate decreased to 73.75 trillion won from 75.55 trillion won.

Market analysts attributed the surge in banks’ SME loans to the country’s new loan-to-deposit ratio (LDR) rule, requiring lenders to increase loans to companies and reduce the share of consumer loans.

From next year, the weight of corporate lending in a bank’s LDR ratio will be raised by 15 percentage points, while cutting that much share of household loans.

LDR is a gauge of a bank’s liquidity by comparing its total loans to its total deposits, and the typical ideal LDR ratio is from 80 percent to 90 percent. The financial authority regulates new loans by banks if their ratio goes beyond 100 percent.

As of the end of June, Shinhan registered LDR ratio of 97.0 percent, KB Kookmin 97.7 percent, Woori 96.9 percent, and KEB Hana 97.3 percent. To contain the loan ratio under 100 percent, they need to expand either deposits or business loans. Given the cheap rate, lenders prefer to extend more loans.

Still, interest income did not increase that much from the surge in loans.

Net interest margin of KB Kookmin, Shinhan, KEB Hana, and Woori ranged from 1.49 percent to 1.70 percent in April-June period this year, falling up to 0.03 percentage points from the previous quarter.

Net interest margin, the difference between interests paid on deposits and earned on loans, is the key measure of a bank’s profitability.

By Kim Tae-sung and Cho Jeehyun

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