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Efficiency of State Banks Criticized

Posted September. 28, 2006 03:26,   


Three state-funded banks were established in series in the 1950s and 1960s when the economic development projects were pushed for in earnest. Their primary purposes were raising industrial capital and supporting exports. As the mission of the times lost its validity, however, the identity of the banks is in question.

The Board of Audit and Inspection issued a timely report on September 26 on the review of management, charging the banks for its over-diversification. The board criticized the banks for their lax management and diversifying into unrelated business areas.

The Korea Development Bank (KDB) does business on a wide range of retail financing, trading corporate bonds, supplying funds for companies going abroad, and developing overseas resources. The bank explained that these are part of becoming Korea’s leading investment bank.

The Industrial Bank of Korea (IBK), which was created to support financing of small-and-medium-sized companies, came forward to buying a life insurance company. It said it is a step for becoming “mammoth bank” with 200 trillion won in assets in five years.

In doing so, the bank built up the proportion of household credit, not its core business. As of the end of the second quarter of this year (April to June), the industrial bank’s consumer credit accounted for 17.1 percent of its total loans, up 3.1 percent compared to the same period two years ago.

Facing fiercer competition and increased job insecurity in the private sector, the public has sentiment against state-financed banks, which have a reputation for being blessed job with high salary and security.

The Three Chairmen Worked at MOFE-

The government has recently formed taskforce under the Ministry of Finance and Economy (MOFE) and launched a project for restructuring state-financed banks. Yet, nobody knows when the result will come out since it is known to be hard to coordinate different opinions among government departments and researchers.

According to the report on “the future direction of the Industrial Bank,” written by Korea Institute of Finance (KIF) and submitted to the MOFE, the bank should move toward the double structure of policy financing and commercial financing, and the role of commercial financing should go to its subsidiary.

This is in contrast to the opinion of the Board of Audit and Inspection, which suggested the bank sell its subsidiary and implement restructuring. The government, which has been drafted reform measures based on the KIF report, now has to review the contradicting opinions.

The government also has to dispel doubts about its protecting its own people. Kim Chang-rok, Chairman of KDB, Kang Kwon-seok, Chairman of IBK and Yang Cheon-sik, Chairman of Export-Import Bank of Korea were once officials of MOFE, which means the government’s reshuffling measure is not likely to be implemented within this year.

Mixed Voices about the Abolishment of State-owned Banks-

State-financed banks are worried about the pouring disapproval. They have complaints of unilateral criticism but they are lying low not to worsen the situation.

An official at KDB said, “We are not trying to take clients from commercial banks but we intend to contribute to national interest using our experience and brand power.”

KIB also said, “Expanding the size of assets will eventually benefit small-and-medium-sized companies.”

Financial experts are opposed to leaving the banks unchanged, but have different opinions in privatization.

“The very movement of the state-financed banks trying to expanding their business areas signals it is time to privatize them,” said Ko Sung-soo, professor of Konkuk University. “KDB’s competitive businesses like international financing should be properly privatized.”

However, not a few people approve the existence of state-funded banks.

Yoon Young-hwan, researcher at Goodmorning Shinhan Securities said, “Still, only state-funded banks can deal successfully with supplying funds to small-and-medium-sized companies, supporting expanding to overseas market, and engaging in North Korea development project. They should serve as a pioneer to support in areas where the private sector alone can not perform.”