[Editorial] Lopsided bank loans threaten balanced growth

According to a Bank of Korea (BOK) survey, more of the loans made by banks since the foreign exchange crisis in late 1997 were for businesses in the service sector such as hotels and restaurants than for manufacturing industries. The loans for the service sector represented 23.4 percent of the total bank loans at the end of 1997 but the ratio of loans to the service industry recorded 33.6 percent, an increase of 10.2 percent, by the end of June this year. The loans to the manufacturing sector, on the other hand, marked a decrease of 6.9 percentage point from 52.4 to 45.5 during the same period.

Should such a trend continue, it will seriously threaten the balanced and sound growth of the nation's domestic economy. For that reason, we should like to place a critical importance on the BOK's survey findings. A watchful eye will also be kept on the subsequent turnouts of the loan trend.

The intensive bank loans for the service industries began in January, 1998 when the Kim Dae-Jung administration lifted the regulations to ban bank loans to such service industries as hotels, restaurants and real estate dealers. The removal of such restrictions was seen as a part of the administration's measures for economic stimulation which was thought to be needed then.

In retrospect, however, it appears that the removal was hasty and the ban should have been retained. It is having adverse effects on our economy. We also deplore the way banks abused to the utmost the lifting of the loan restrictions. Banks were in a competition to arrange as many loans as possible for such pleasure-seeking businesses as casinos, restaurants, and massage parlors. This has given rise to the people's unhealthy patterns of life for pleasure consumption, as is evidenced by the mushrooming of the so-called `love hotels,' motels largely catering for customers for sex.

By contrast, the manufacturing industries, which represent the pillars of the country's economy, suffer from cash crunches, barely surviving day by day from the liquidity shortages. Bank's tightened loan regulations due to the impending financial restructuring have seriously reduced loans for firms in the manufacturing sectors. This has deepened the distorted distribution of loan funds and credits.

These cash-crunched firms cannot hope to directly finance their operating capital from the present bearish stock markets. Under such circumstances, banks' near-sighted loan policies are creating the worst kind of liquidity crisis for the business corporations. Granted, it is entirely banks' exclusive rights to make their loan decisions for businesses. However, we are disappointed by the lack of the Financial Supervisory Service's remedial measures to address the situation.

The FSS could have taken some measures to remedy banks' lopsided loans for the unhealthy services industries. It could have used its leverage on the banks which need the government's rescue funds for their restructuring. Certainly, the general public will not want to see that banks extend loans to love hotels out of the rescue funds banks obtained from the government. Nor is it the way the public wanted to see as bank's business normalization. Despite some risk factors, loans policies must give priority considerations to manufacturing business sectors. Bank loans prejudicial to manufacturing firms can put the nation's economy in trouble. Banks then must know that they can hardly survive from the country's troubled economy. Critical self-examination on the part of both banks and their supervisory agencies are called for in making radical changes to their loan policies.