By Na Jeong-ju
Staff Reporter

The financial market is setting its sights straight on the dark side of strong overseas shipments and steep rises in the value of assets in recent years _ the oversupply of money and inflation.

An increasing number of analysts are voicing concerns that rapid rises in bank loans and growing interest burden for households could pose a serious threat to the economy.

Being well aware of this, policymakers are moving to adopt measures to tighten money supply. Fortunately, consumer prices have remained stable and real estate prices have lost strength, but there are so many factors in store hampering economic growth, analysts say.

The excess liquidity is expected to heighten inflationary pressure in the coming months, pushing the Bank of Korea (BOK) to take necessary measures to control monetary flows.

``(Excess liquidity) is a mountain to climb to achieve a sustainable economic growth,'' Vice Finance and Economy Minister Cho Won-dong said in early June.

In April, the country's money supply grew at a slower pace than previous months, but still showed a fast rise.

The outstanding liquidity aggregate, the broadest measure of money supply, amounted to 1,889 trillion won as of the end of April, up 0.7 percent or 12.7 trillion won from the previous month. In March, the growth rate was 0.9 percent.

After the BOK decided to freeze its call rate at 4.5 percent for the 10th consecutive month on June 8, BOK Governor Lee Seong-tae hinted at a call rate hike in a desperate bid to absorb liquidity.

``Last year, the main booster for liquidity was mortgages. This year, banks are providing record-high loans to small companies amid the sluggish property market. We are paying keen attention to the matter,'' Lee told reporters.

Side Effects

Experts agree rises in mortgages and loans to small and mid-sized enterprises (SMEs) as well as increasing overseas short-term borrowing are emerging as factors that could jeopardize the economy. They say the rising liquidity can trigger an imbalance in the financial market and make it more volatile.

``The oversupply of loans to SMEs will slow down banks' profitability and the economy,'' the Korea Institute of Finance said in a report last month.

Policymakers have urged banks to refrain from extending loans to smaller firms, citing rising default risks. Banks have increased loans to small firms, while decreasing housing loans in line with the government's measures to stabilize the property market.

In an effort to fight growing liquidity, the BOK has issued monetary stabilization bonds and taken a series of other measures. However, analysts say the measures haven't achieved the desired effect as the Korean currency has gained strength against the dollar.

When the Korean currency rises excessively against the dollar, the financial authorities usually intervene in the currency market via state-run banks, which buy dollars to help slow the pace of the won's gain.

The purchase of dollars means more supply of the won on the market and the central bank needs to issue monetary stabilization bonds to absorb extra liquidity and to ease inflationary pressure.

On the other hand, there are different views on the liquidity growth.

Banks have raised their voices in favor of growing loans to SMEs, apparently being nervous about growing calls from the government for lenders to cut back on these loans.

They argue SME loans can play a positive role in reviving the sluggish manufacturing sector, improving corporate investment and creating more jobs at smaller firms.

``We have strengthened risk management to minimize the negative side-effects of the growth of loans on our asset quality,'' an official at Shinhan Bank said.

In the first quarter, bank loans to companies and households grew 16.7 trillion won, of which 83 percent, or 14.2 trillion won, were extended to smaller firms. Loans to conglomerates increased only 46 billion won during the same period.

In April alone, SME loans jumped 7.9 trillion won from a month earlier, according to BOK data. Loans to SMEs increased by 44 trillion won last year.

The worst scenario is that a large number of small firms will be compelled to declare insolvency if a ``hard landing'' occurs in the real estate market. The collapse of real estate prices will greatly raise their interest burden and will even make it difficult for them to sell their property and pay off outstanding debts.

``Corporate default rates haven't yet reached a serious level, but what's important is that rising SME loans can pose greater default risks any time if things turn bad,'' said Chung Dae-young, head of the BOK's Financial System Stability Department.

Companies' debt repayment capabilities have worsened in line with the rapid growth of SME loans. The situation may be further aggravated if the Korean won keeps gaining strength against the dollar and oil prices rise further, denting corporate margins from exports, according to Chung.

``Even a few months ago, banks put the top priority of their lending policies on mortgages. However, there has been a significant change since the government stepped up its intervention to reduce mortgage demand,'' said Lee Kwang-joon, head of the BOK's Economic Statistics Department.

An alternative for banks to keep their interest income is small companies. Banks have made it easier for firms to borrow money by lowering credit criteria since late last year.

``SME loans are expected to maintain their growth momentum until banks change their lending practices and find alternative business models,'' Lee said.

Last month, the BOK sold a record amount of bonds under repurchase agreements (RPs) to banks to absorb excess liquidity, strengthening its intervention on money flows in the market.

The bank sold 15-day RPs worth 5 trillion won and 6-day RPs worth 3.5 trillion won, the largest ever one-day transaction. RPs are one of the crucial means for the central bank to control short-term liquidity flows. It later buys RPs back with a certain amount of interest payment if liquidity problems ease.

The large-scale RP contract reflects growing concerns about swelling liquidity in the market, a result of strong exports, bullish stock markets, an increase in the value of real estate and other factors, the bank said.

jj@koreatimes.co.kr