SEOUL, Aug. 25 (Korea Bizwire) – As many large firms have been aggressively repaying their debts, bank loans to large companies dropped to a 10-month low in July. Unlike the increase in the number of bank loans to SMEs, large companies are turning to direct financing channels including bonds, commercial paper (CP) and stock issuance.
According to an August 24 statement from the Bank of Korea, bank lending to large firms reached 164.7 trillion won (US$137.6 billion) at the end of July, down 300 billion won from the previous month, the lowest level since the 164.9 trillion won posted in September last year. It also marks a sixth straight month of decline.
On the other hand, loans to SMEs increased by 36.9 trillion in July to 543.8 trillion won. Of note, loans to individual businesses increased by 17.1 trillion won, almost half of the total increase for the SMEs.
This phenomenon has occurred as large companies can raise funds through direct financing channels amid low interest rates, but smaller ones cannot but help depend on bank loans. Large companies don’t need bank loans as they can borrow money at low cost by issuing bonds in the low interest environment. Even in the fund raising market, the polarization deepens.
In fact, the net issuance of corporate bonds reached 1.9 trillion won in May and 1.1 trillion won in June. In total, the net issuance of corporate bonds increased by 3.3 trillion won this year. In addition, a total of 3.3 trillion won worth of new shares were issued during the period. The CP issuance went up by 900 billion won.
Meanwhile, the strategy of large firms to repay loans in order to improve their financial structure, as well as stockpiling cash to avoid new investment were picked as the reasons for the reduction in their number of bank loans.
By John Choi (email@example.com)