The Anxiety for the Worsening of Bank Profitability

As household loan market has become matured, bank industry began to compete for small and medium business loan market.

Some banks offer no-margin loan to small and medium business to secure market in advance. So someone worries that it may make banks worse in profitability and cause them insolvent.

At 5th, according to bank industry, the balance of loan to small and medium business by bank industry was 143.2 trillion won in the end of 2001and increased to 172.8 trillion won at the end of this September and increased again in the end of the last month.

According to bank classification, in case of Kookmin Bank, the balance of loan for small and medium business was 35.6 trillion won at the end of October increased by 1trillion compared to September of 34.6 trillion won.

Industrial Bank and Woori Bank recorded the balances with 3.1 trillion won, 21.3 trillion and increased by 1 trillion won compared to September respectively.

Chohung, Shinhan, Hana, Hanmi etc participated in the competition with the extension of loan to small and medium business by 100- 500 billion won respectively.

The reason for the banks to increase loan to small and medium business is that the demand for fund by large-sized business is contracted and the growth of household loan also stagnates. So the banks dedicate in extending loan to healthy small and medium business at low interest rate.

So the average interest rate of loan to small and medium business decreased to 6.49% in September. It is the lower level by 0.01% than the lowest level of August of 6.50% in history. The interest rate dropped by 0.64% compared to the September (7.13%) of 2001.

Kookmin, Woori, Hanmi, Shinhan, etc offer loan with free interest rate to the business that gives benefits to the banks in other operation such as foreign currency transaction, etc.

Someone warns that if the banks continue this severe competition, the banks will be worsened in profitability and cause the increase of bad debt.

Lee Byung-yoon, a researcher of Korea Institute of Finance indicated, “Banks do not manage risk on small and medium business.” And he added “Under the circumstance, the competition of loan that does not reflect credit and risk may cause their insolvency like household loan.”

Chi-Young Shin higgledy@donga.com