News : Banks to Reduce Loans to Small Firms to Rein in Credit Risks

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Banks to Reduce Loans to Small Firms to Rein in Credit Risks

January 3, 2008

Banks are expected to strengthen lending rules on small- and mid-sized enterprises (SMEs) in a bid to reduce their exposures to credit risks amid dwindling consumer deposits, analysts said Wednesday.

Corporate loans have grown rapidly since late 2005 on steep rises in loans to smaller firms and household businesses, but manufacturers' facilities investment has remained sluggish.

Financial regulators have warned banks of greater default risks, saying a recent surge in SME loans will harm banks' financial health.

Last month, Financial Supervisory Service (FSS) Chairman Kim Yong-duk said the regulator will strengthen its gover ning of financial firms' soundness and risk management, and take measures to prevent them from ``reckless lending,'' so the Basel II capital adequacy rules can be stably implemented this year.

``Last year, SME loans surged on growing demand amid an economic recovery and banks' active lending,'' a Shinhan Bank official said. ``SME loans now account for some 47 percent of the total won-denominated loans extended by banks, up from 44 percent in early 2006.''

Kookmin Bank, the country's largest lender, has virtually stopped extending fresh loans to SMEs and household businesses on instructions from the FSS. Officials said the bank will resume loans to qualified borrowers after sorting out firms whose financial conditions are not stable enough to get loans.

Banks' lending rates for SMEs reached the highest level in five years during 2007 as lenders aggressively expanded loans to smaller firms to offset falling profits amid dwindling household loans.

``Lending rates for SMEs have risen sharply as they move in tandem with the yields of treasury bonds or bank debentures, both of which rose,'' a Bank of Korea (BOK) official said.

Banks are tightening credit criteria for SMEs to rein in credit risks amid warnings that loan default rates will rise as a result of competition to increase riskier loans for higher interest income.

The measure reflects concerns that the rapid rise in corporate loans is fueling the country's liquidity expansion. The BOK and the FSS earlier launched a joint inspection of firms over speculation that many have used bank loans to invest in real estate and securities.

Such tightening policies, however, have invited criticism from the companies.

``Banks competed to extend more loans to smaller firms even a few months ago. Now, they say there will be no loans available just because of rising default risks,'' a spokesman of the Korea Federation of Small & Medium Business said.

Source : http://www.koreatimes.co.kr