Abrupt Shift Seen in Loans to Smaller Companies

Financial authorities have urged banks to extend loans to small and medium-size companies to help the sluggish real economy, but have shifted its policy direction to viable companies.

Judging that the real economy has passed the worst in which companies collapse en masse, the government will now seek to curb moral hazard, wherein crooked business owners seek to profit from financial subsidies.

Industry sources yesterday said the Financial Supervisory Service has changed its guideline on unconditional bank rollovers of existing loans to new ones, which allows banks to use self-judgment on such rollovers.

The financial watchdog will also closely monitor loans to smaller companies if they are extended to those ineligible, and prevent such loans from flowing into “zombie companies” that would not survive under normal conditions.

Above all, the agency is gathering data from banks on the number of companies that shut down early, type of industry, and type of loan to trace companies that borrow from banks and close within a month as a way of pocketing the subsidies.

By analyzing this data, the agency plans to generate a report on this moral hazard and guidelines and distribute it to banks. It will toughen up its review of loans to small companies based on the guidelines and revamp the support program itself if moral hazard is found to be rampant.

The latest move is a far cry from earlier efforts by financial authorities to expand liquidity in the market as recently as only two months ago.

One financial supervisory official said, “The top priority now is to release liquidity and save smaller companies, and moral hazard is an inevitable side effect.”

The new measure is apparently intended to oust companies deemed unviable by beefing up loan reviews rather than unconditionally pumping money into smaller companies and trying to save them all.

chance@donga.com