Make haste slowly on bank lendingAfter President Park Geun-hye criticized passive bank lending practices, financial authorities are considering a set of deregulation measures to offer banks incentives to increase loans and ease sanctions for problem loans. Authorities are even suggesting that banks turn aggressive enough to give loans or make equity investment in companies with poor credit ratings.
Banks could finance these companies under relationship managers who would monitor business performance and potential risks, even if the companies do not meet eligibility requirements. Banks strongly protest; they say risky lending practices that bypass strict guidelines could jeopardize their liquidity.
Domestic banks are notorious for “lending an umbrella in fair weather and asking for it back when it begins to rain.” They rely primarily on the earnings from the spread between what they pay on deposits and what they charge for loans as their revenue base. That is why Korean banks still lag behind even their Asian peers in profitability and competitiveness. They agree that they must seek out new clients in start-ups and small businesses with promising prospects. But they cannot break their old, conservative habits when they sit down at the review desk. They will not get anywhere and will slow down the economy along the way if they keep to their judgmental lending practices. But the government cannot ask them to go as far as to risk their financial integrity.
The main idea behind the prescribed economic stimuli from the new Deputy Prime Minister Choi Kyung-hwan is a smooth and active capital flow. Under the new economic measures, lenders work under lowered loan-to-value and debt-to-income ratios in extending mortgage-related loans. Single-dwelling owners can also borrow from state housing funds to invest in new real estate at low interest rates. Public enterprises that benefited from the strong won this year would have to surrender 5 trillion won ($4.9 billion) of their earnings to help stimulate the economy. With the government going all-out, even digging into the pockets of heavily-indebted public companies, it naturally cannot be satisfied with banks’ passive business ways.
But banks should not be forced to make rash and risky credit decisions. The role of the financial sector is to redistribute capital in an efficient manner. Easy liquidity may temporarily inflate the economy, but the aftermath often is disastrous. Regardless of what the president wants, financial authorities must not confuse recklessness with rationalized lending.
JoongAng Ilbo, Aug. 2, Page 26