Credit lines at South Korean financial institutions tend to concentrate on unproductive household loans and small businesses that combine to hamper financial efficiency. (image: Korea Bizwire)
SEOUL, Oct. 16 (Korea Bizwire) — South Korea’s financial industry may have reached the point of excess where its growth will only undermine further economic development.
According to the Korea Institute of Finance, credit lines at South Korean financial institutions tend to concentrate on unproductive household loans and small businesses that combine to hamper financial efficiency.
Household loans increased from 494.5 trillion won in 2002 to 1.47 quadrillion won in 2016, expanding by 8.1 percent on average each year. Business loans, however, grew only by 6.9 percent, from 618.1 trillion won to 1.57 quadrillion won.
The ratio of household loans to GDP was 92.8 percent in 2016, ranking seventh among OECD states. In contrast, the business loan to GDP ratio reached no more than 100.4 percent – most likely the result of financial institutions having expanded the supply of low-risk secured loans that require less monitoring and have more lenient qualifications than business loans.
Government strategy has also contributed to the situation.
Policies discouraged business loans during the early 2000’s when South Korea was still recuperating from a financial crisis, and legislation to boost the real estate market following the 2008 financial crisis lifted restrictions on mortgage loans which most likely led to the increase in household debt.
Mortgage loans and other household loans, however, have lower productivity compared to business loans, even if they increase in number.
Business loans, too, can be less than productive when focused on small businesses such as real estate, transportation, and warehousing enterprises – and this is the South Korean experience today.
Companies with more than 1,000 employees comprising 53.9 percent of gross value added (GVA) accounted for 42.3 percent of indirect financing such as loans, while companies with fewer than 50 employees, comprising only 8.4 percent of GVA, were the recipients of as much as 27.3 percent of indirect financing.
This shows the possibility of excessive financing from a quantitative perspective, leading to worry about the threats posed against the South Korean economy as a whole if lending continues to expand.
The credit line to GDP ratio, known as financial deepening, reached as high as 143 percent in 2016. It is understood that financial growth becomes less effective when the financial deepening ratio exceeds 120 percent.
In terms of employment, South Korea ranked as high as 10th among OECD countries when it came to the ratio of financial workers to total number of employees.
Experts argue that once financial expansion exceeds a certain limit, capital and human resources begin to flow into less productive sectors, hurting the productivity of the economy as a whole.
Kim Cheon-gu, a researcher at the Korea Chamber of Commerce and Industry’s Sustainable Growth Initiative, called for “an institutional framework to rein in excessive financing and prevent the immoderate expansion of credit lines.”
H. S. Seo (hsseo@koreabizwire.com)
