This paper examines the extent of mortgage lending in banks, the nature of the problems excessive mortgage loans create, and where those problems originate from. This will help to identify ways to increases small- and medium-sized enterprise (SME) access to bank lending. Korean SMEs have limited access to direct financing compared to large companies due to relatively high transaction fees for small loans, high information costs for obtaining data, inefficient family management, and business financing through bank loans and indirect finance.
As legal debtors for creditors, when lending, Korean banks demand SMEs provide real estate as collateral, a letter of repayment guarantee from a financial institution, a letter of guarantee from a credit fund, and joint liability on guarantees. Banks unilaterally exercise superior bargaining power when dealing with SMEs. Such excessive collateral requirements for loans inhibit real economic development. In the event that a SME goes bankrupt, the bank makes greater profits by charging the company with the expenses incurred from disposing of its collateral and late fees. In addition, banks apply differential interest rates depending on the company’s credit rating. Stable companies are charged with low interest rates, while those with low credit ratings bear higher interest rates, leading to an increased volume of debt. Korean banks’ obsolete lending processes aggravate problems and undermine a credit-based society, thereby facilitating private money markets.
SMEs suffering from banks’ mortgage-backed lending practice—where stronger security is demanded—can expect the Credit Guarantee System. Under this system, public organizations can serve as an official sponsor for companies and bear the final responsibility of collateral with regards to corporate lending. If this system continues, SMEs are expected to have greater access to the loan market, and, in the long term, will lead the credit-based society. Thus far, about 14 to 17 percent of SMEs benefit from the Korea Credit Guarantee Fund.
In order to address the existing practice of lending money to SMEs only on security or collateral and transferring all incurred burden back to the companies, the government needs to introduce a system that restricts the bargaining power of banks and better distributes financial resources from the government. In addition, the government should establish a system to require banks to sustain losses when neglecting their own responsibilities, institutionalize measures to reduce excessive demand for collateral by banks, formulate policies to lower the superior bargaining status that banks have over SMEs, maintain the Korea Credit Guarantee Fund’s full loan guarantees for SMEs, increase SME access to lending by replacing collateral-based lending with credit guarantee lending, and convert the Korea Credit Guarantee Fund’s full guarantee to a partial guarantee. Through these measures, Korea can introduce an effective system that expands credit loans and reduces subrogation by the Korea Credit Guarantee Fund.
중소기업의 대출시장접근 확대방안(Measures to expand SMES’ access to lending market)
|Series Title; No||정책연구시리즈 / 94-13|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|