Relational banking is a plan intended to improve the relationship between the bank and the small enterprise based on long-term trust rather than arm’s-length transaction demanding collateral or guarantors. (image: Kobizmedia/Korea Bizwire)
SEOUL, Nov. 18 (Korea Bizwire) – The government will provide long-term loans to small- and medium-sized enterprises based on ethical performance of their owners and CEOs. It will also allow banks to take controlling stakes in companies by making long-term loans longer than three years.
On November 16, the Financial Supervisory Service announced a plan to introduce a “relational banking” scheme to be implemented from the 24th. In order to institute the scheme, the regulator has gone through rounds of task force meetings, externally commissioned research projects, and seminars.
Relational banking is a plan intended to improve the relationship between the bank and the small enterprise based on long-term trust rather than arm’s-length transaction demanding collateral or guarantors. Up until now, it is a general practice for banks to avoid lending to those companies with a low credit rating or little collateral even though their business prospect is excellent.
Once the relational banking scheme is in place, however, all non-quantifiable information about the company will be considered for lending, including the CEO’s ethical standards, management team’s quality, industry reputation, ability to repay debt, and stability in labor relations.
Banks will also be able to participate in the company’s management by giving long-term loans extending more than three years and taking up to 15-percent stake in the firm. In this case, the banks can share the firm’s business performance in the form of dividends and capital gains.
By Sean Chung (schung10@koreabizwire.com)
