Lending practices for small companies

An LED maker signed a loan contract with a bank and prepared a loan agreement document. The company, however, failed to borrow the money because a guarantee agency that had promised a technology credit guarantee refused to issue the certificate. The bank canceled the lending contract given the absence of the certificate. Certified as an environment-friendly company for its technology, the LED maker could not break down the barriers of Korean lending practices.

Small and medium-size companies with strong growth potential and technological capability are facing difficulty in borrowing money from financial institutions because of difficulty in getting loan guarantees. Despite growing calls and government measures to improve lending practices, the situation remains unchanged. Conservative lending practices by financial institutions are holding back the younger generation, which hopes to follow the footsteps of Samsung Group founder Lee Byung-chull and Hyundai Group founder Chung Ju-yung. Unless lending practices are revamped, young people will ultimately give up starting businesses and shift to civil service exams or jobs at state-owned or private companies.

The structural problems of financial institutions and credit guarantee agencies also impede the improvement of lending practices for smaller companies. In credit criteria screening, receiving a guarantee is recognized as a tangible fact and is not blamed if a company defaults. Potential and technological ability are viewed differently according to each entity, however, meaning a company can be blamed when a mistake is made. Because of this, it is difficult to blame lending practices by not considering the gap between justification and reality.

The Financial Services Commission plans to improve lending practices for smaller companies by suspending policy loans to them that exist on the back of banks’ moral hazard and their unwillingness to stomach even a small risk. It will seek the injection of more loans into young start-ups and promising companies. Chairman Kim Seok-dong said, “We will overhaul chronic lending practices in a bid to lend an umbrella to smaller companies when it rains." Financial and banking regulations will be revamped to free smaller companies that observed business feasibility screening from defaults after loans are made. Proper introduction of the system will lead to a fundamental change in banks’ overall lending system centered on credit guarantees. Lending practices for smaller companies should be revamped over the course.

Potential side effects should not be overlooked, however. In the late 1990s and early 2000s, the government injected huge capital into venture companies, which led to wealth accumulation at certain ill-intended companies and fueled corruption involving government officials. This ultimately led to defaults in financial institutions and an increasing burden on the public. The government should be cautious not to repeat such a situation since it will only lead to failed reform.