South Korean banks had vowed to support smaller firms to cater to President Park Geun-hye's "creative economy" vision, but their track record on such loan extensions failed to meet expectations, data showed Monday.
The "creative economy" refers to President Park's trademark growth strategy that calls for boosting the economy by creating new business opportunities, industries and jobs. Park also pledged to address what small businesses call "a thorn stuck under their fingernail."
To be in line with the government's lenient stance toward smaller firms, local banks scurried to unveil plans to increase lending to small and medium enterprises (SMEs), but such loan supply remained tepid, industry data showed.
In June, 17 local banks vowed to raise lending to SMEs by 20.2 trillion won (US$18.8 billion) to 475 trillion won in the second half to help smaller firms ease their funding squeeze. In July and August, such lending rose by only around 5 trillion won, the data showed.
No. 3 lender Shinhan Bank in April pledged to supply 7.6 trillion won in loans to SMEs this year, but such lending increased by some 3.2 trillion won between January and September.
The state-run Industrial Bank of Korea, which mainly caters to SMEs, set the target for the certain type of loans for smaller companies at 500 billion won, but the actual execution of such lending facility reached some 11 percent of the target.
Smaller firms are having difficulty in raising funds as it is not easy for them to issue bonds due to their relatively low creditworthiness. But banks are also wary of extending loans to them due to their high credit risks, or the likelihood of borrowers being unable to repay debt.
Local banks said that despite high credit risks, they are likely to remain lenient toward smaller firms in the fourth quarter, in line with the government's push to increase financing to SMEs, according to a central bank survey.
But most local banks are in reality strict on extending loans by requesting SMEs to provide collateral and by selectively supplying funds to relatively sound small companies, experts say.