[EDITORIALS]When banks play it too safe

Lee Hun-jai, the deputy prime minister of finance and economy, recently said: “Banks, caught up in defeatist psychology, avoid giving loans to escape responsibility for insolvencies, and try to play it safe because of the ‘foreign exchange crisis syndrome.’” These are valid points.
During the foreign exchange crisis, our banking industry underwent major changes. The number of banks was reduced, and large banks such as Cheil and Kookmin were sold into foreign hands. Korean banks now concentrate on consumer financing, which has low risk and high profitability. In 1998, 75.9 percent of bank loans were industrial loans; by June of this year, that figure had fallen to 52.7 percent. Meanwhile, consumer loans’ share skyrocketed from 24.1 percent to 47.3 percent. As the banks looked for safety, loans for industrial facilities made up only 20 percent of industrial loans.
But banks are not the only ones to be blamed. Since their employees must take responsibility for insolvencies under the current system, they cannot help but be passive. They cling to security, disregarding borrowers’ capabilities in technology and management. As a result, banks with accumulated capital have difficulty finding borrowers, and businesses suffer from lack of capital. This problem can’t be solved solely by cricitizing banks. Besides the issue of new loans, existing ones can be withdrawn on the slightest sign of difficulty on the part of the borrower. In August, when the Bank of Korea lowered the call rate, commercial banks’ loans to small and medium-sized businesses decreased by 600 billion won ($528 million). Because of such restraints, business activity can’t be stimulated by expansion of finance, tax reductions and lower interest rates. Lending big money to insolvent big businesses, as was done in the past, should never be repeated, but there is a problem if businesses with growth potential can’t develop technology and products because they can’t borrow.
There should be a clear standard of responsibility to let banks and their employees make reasonable decisions on loans. The banks must do their part if they want to avoid being criticized as loan sharks. Mr. Lee worries, “If bank employees are repeatedly made to take responsibility, banking institutions and society will sink to the bottom.” Now that the government has acknowledged the problem, it must come up with a remedy that will make banks play their role.