Credit Extension Funding Hits 10 Trillion Won Mark

The amount of credit extension money security companies lend to stock or bond investors has grown as large as 10 trillion won recently. Concerns are being raised that this near 20-fold expansion from the early days of the current administration could disturb Korea’s financial market and damage the interests of investors in case of a stock market dip.

According to a document on security loans the Financial Supervisory Service (FSS) handed to assemblyman Jin Soo-hee (Grand National Party) of National Policy Committee on October 7, the amount of the credit extension domestic security companies lent investors in the form of credit loans, loans secured by stocks, and securities collateral loans totaled 9.8 trillion won as of the end of September. This is a 19.3-fold increase from the amount as of March 2003 (507.8 billion won).

Credit extension amounts have been rising: to 1.344 trillion won in 2004; 4.1 trillion won in 2005; 4.8388 trillion won in 2006; and 12.2434 won as of June 2007. But it recently declined by a small amount due to new FSS regulations on credit loans.

The steep rise in credit extensions this year is the result of rising stock prices and the increase in the number of individuals seeking to loan money for investment purposes.

In particular, the amount of credit loans based on investment money for purchasing stocks grew by 27 times the amount as of March 2003, to 4.3 trillion won as of September 2007.

Securities collateral loans, money lent with stocks used as a mortgage, also grew steadily after surpassing the 1 trillion won mark for the first time at the end of 2004, and reached 4.8 trillion won at the end of September this year.

Stock market experts express concern that a fall in stock prices could lead to panic selling for the redemption of loan money because many credit loan borrowers purchased stocks of enterprises with no verified record in their pursuit of short term gains.

“A rise in stock trade based on credit, which is partly the result of hardball business tactics by securities companies, can lead to bankruptcies should stock prices fall, and could damage the interests of investors,” said Assemblyman Jin. “Authorities need to come up with appropriate measures to address this.”

Regarding this, a source from the FSS said, “Since May this year, credit extensions have increased as a side-effect of regulations on credit purchase. It apparently will not cause any particular shock to the market.”

legman@donga.com sukim@donga.com