Loans to Small & Medium Industry Increased

As banks have concentrated on the loans to small and medium business, in case of certain banks, the increased amount of loans to small and medium companies exceeded the increased amount of loans to household in this month.

Banks have been criticized only a month ago that they had concentrated on retail financial market such as loans on housing security, and had ignored the support of industry. Therefore, the increase of loans to small and medium business means a swift change in the current temperature in the market.

▼ Greatly Increasing Loans to Small and Medium Business

Thus far this year, the loans to Small and Medium Business increased 804.5 billion won in January, decreased 103.4 billion won in February, and again increased 470 billion won over the previous month, which is much lower than the loans to the household. Loans to Small and Medium Business increased 1 trillion 803.9 billion won over the previous month during April. But it did not signal the reverse of banks` tendency to evade loans to small and medium industry, because the loan demand of small and medium companies, such as various taxes and dividends, has been concentrated during this period.

However this tendency has changed from the end of April.

Banks have taken the tactics to induce small and medium companies to borrow the loan, lowering the interest on a loan to the superior companies. Thus far this month, loans to small and medium companies have already reached over the level of the last month. According to the data collected from the Kookmin Bank, Housing & Commercial Bank, National Agricultural Cooperative Federation, Industrial Bank and Shinhan Bank, loans to small and medium companies increased 1 trillion 143.4 billion won over the previous month, indicating twice the amount of the increase of loans to household (467.9 billion won). In February, March and April, the increase of loans to household were even greater than the loans to small and medium business.

▼ Background of the Change

This loan pattern had derived from the fact that, while banks have hugely attracted customers` deposits, they could not find proper investments. The total amount of deposited money in the banks was 8 trillion 500 billion won last month, and thus far this month, the amount of 3 trillion won has flowed in the banks. But the retain financial market was already saturated.

An official of a commercial bank told that ``there is no more possibility in the retail financial market. Hence banks have attempted to expand loans to healthy small and medium companies to manage the deposited money.``

But this could lead to the banks` insolvency. Because at the end of March, the loan market of small and medium industry has low interest rate (7.9 percent) and high overdue rate (2.4 percent), while the loan market of household has high interest rate (8.8 percent) and low overdue rate (1.5-1.6 percent).

▼ Problems

This change is a positive sign in the sense that banks have improved the financial situation of small and medium companies. Business Survey Index (BSI) examined by the Federation of Korean Industries in April prospected that there would be no financial difficulties in the small and medium companies. The BSI showed that companies had responded to the question about the financial situation, 89 point in January, 94 point in February, 100 point in March, 107 point in April, and 109 point in May (100 point refers to the same situation as compared to the previous month).

However, the increased loans without special demands for fund is concerning. Because the facility investment of the first quarter of this year rather decreased by 7.9 percent over the same period of last year, the current loans could be seen as short-term operation funds. It means that companies have borrowed money because of the cheap interest rate. An official of a financial institution told that ``at the present time, companies have mainly borrowed the short-term operation funds with three months limit. It means a severe short-term fluctuation.``

Lee Heon-Jin mungchii@donga.com