[EDITORIALS]Smaller businesses under fire

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[EDITORIALS]Smaller businesses under fire

Because of increasing concerns about possible mass defaults by small and medium-size businesses, the government has begun to press banks into relaxing their lending standards to such companies. The chairman of the Financial Supervisory Commission recently warned, “It is not proper to withdraw loans from companies without special problems before maturity.”
The Ministry of Finance and Economy and the Bank of Korea are joining in such moves, through requiring banks to clearly state the reasons and procedures for withdrawing loans from small and medium firms. The government is running the risk of being criticized for intervening in the markets.
Banks have recently tightened loan provisions for small and medium companies. The monthly expansion of such loans was 2 trillion won ($1.8 billion) to 3 trillion won in the past, but has now dropped to below one-tenth of those amounts. In addition, 80 percent of new loans to those companies are short-term loans of less than one year.
If such conditions last, small and medium companies might go bankrupt all at once; that could bring about a financial crisis, the government said.
But the banks have their reasons. Their outstanding loans to small and medium firms total 250 trillion won, and the ratio of bad debts to such loans is nearly 10 times as high as the ratio of bad debts to loans to large companies. If such bad debts expand, bank executives and staff will have to take the responsibility for it. Accordingly, banks say that they have no choice but to be cautious in providing loans to smaller companies.
It is not right to ignore increasing delinquency or to allow banks to collect loans from small and medium companies, which will cause the collapse of manufacturing industries. It cannot be ignored that these companies are boosting employment.
High-tech companies and those with great growth potential should not be allowed to collapse. Some analyses show that 20 percent of small and medium companies with temporary troubles can survive with the right aid.
Banks should change their profit-hungry attitudes and develop new methods of screening for loans. The government should know that it is inconsistent to require banks to make large bad-debt provisions, while ordering them to abstain from collecting loans. The government’s supervision should match reality.
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