"Interest Burden Reduced by 90 Billion"... '14 Trillion' Loan Released by Bank of Korea [Kang Jin-kyu's BOK Watch]
- The Bank of Korea announced that it will expand the Financial Intermediary Support Loan (FISL) limit from 9 trillion won to 14 trillion won, thereby extending low-interest loan benefits to SMEs and self-employed individuals.
- Governor Lee Chang-yong explained that this measure will reduce the interest burden on SMEs by about 90 billion won.
- The Bank of Korea's support is an extension of special support following COVID-19, and it could spark debate over the role of the central bank versus government fiscal policy.
- The article was summarized using an artificial intelligence-based language model.
- Due to the nature of the technology, key content in the text may be excluded or different from the facts.
The Bank of Korea recently decided to increase the limit of the Financial Intermediary Support Loan (FISL) from 9 trillion won to 14 trillion won, targeting local small and medium-sized enterprises (SMEs) and low-credit self-employed individuals. This decision aims to provide more low-interest loans to self-employed individuals and SMEs struggling due to sluggish domestic demand. How can the central bank, which is the bank of banks, lend to general businesses?
The Bank of Korea does not supply loans by attracting corporate borrowers through counters like general banks. The FISL utilizes commercial banks. When banks provide loans according to relevant regulations, the Bank of Korea supplies funds to the banks at a low interest rate (1.5% per annum).
The entire loan performance of banks is not supplied. In the case of this FISL, the Bank of Korea supplies an amount equivalent to 75% of the bank's loan performance for the supported SMEs. If a loan of 1 billion won is provided, 750 million won is supplied to the bank at a low interest rate (1.5% per annum). The bank considers the FISL support interest rate of 1.5% for the 750 million won and applies a separate loan interest rate for the remaining 250 million won to determine the loan interest rate for SMEs.
Lee Chang-yong, Governor of the Bank of Korea, explained, "Increasing the FISL by 5 trillion won will reduce the interest burden of vulnerable SMEs by about 90 billion won."
However, not all industries are eligible. The Bank of Korea excludes industries such as real estate and pubs from support. Hospitals are also not supported as they are considered relatively better off.
The FISL has its roots in the selective rediscount system introduced during the Park Chung-hee administration in 1962. It originated from the use of central bank issuance power to foster industries when government finances were not solid. Although it was changed to the Total Limit Loan in 1994 and the FISL in 2013, the main framework of providing low-interest funds to SMEs has been maintained.
The special support currently being operated for SMEs began by utilizing the reserves during the COVID-19 period. It was scheduled to end in July last year after being extended in January of the same year, but it was extended to July this year with a scale of 9 trillion won. This decision was made due to the continued difficulties in business conditions, such as rising delinquency rates and increased closures. Recently, an additional 5 trillion won was added, bringing the total special support to 14 trillion won.
It is rare to find examples outside the Bank of Korea where funds are supplied in the FISL manner. Many view it as something the government should do as fiscal policy because it effectively subsidizes interest for specific groups.
There is also internal debate within the Bank of Korea about the necessity of the FISL. Former Monetary Policy Committee member Cho Yoon-je strongly opposed extending the temporary support last January.
At the time, Cho argued, "The deterioration of SMEs' financing conditions is an aspect that must be inevitably endured in the process of implementing a tight monetary policy to promote price stability," adding, "Expanding the FISL operation, which can give a signal different from the monetary policy stance in the current situation where the risk of spreading to the entire financial system is extremely limited, is not appropriate."
On the other hand, some believe that if combined appropriately with monetary policy, it can be highly effective. Barclays evaluated the Bank of Korea's decision to freeze interest rates and expand the FISL at the last Monetary Policy Committee meeting as "the optimal decision," noting the response to exchange rate instability with the interest rate freeze and the response to the difficulties of vulnerable self-employed individuals with the FISL expansion.
Kang Jin-kyu, josep@hankyung.com

Korea Economic Daily

hankyung@bloomingbit.ioThe Korea Economic Daily Global is a digital media where latest news on Korean companies, industries, and financial markets.PiCK News
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