Efficacy, eligibility requirements of banks' $1.2 bil. financial assistance questioned

Financial Services Commission Chairman Kim Joo-hyun, left, and Financial Supervisory Service Governor Lee Bok-hyun, second from left, attend a meeting with local commercial lenders at the Korea Federation of Banks in Seoul, Thursday. Yonhap

A plan by 18 local commercial lenders providing a combined 1.6 trillion won ($1.2 billion) in financial aid to small businesses and self-employed people is facing efficacy and eligibility requirement concerns, market watchers said Thursday.

Up to 3 million won in paid interest will be returned to only about 1.87 million solid-credit small merchants who borrowed from commercial lenders. Excluded are their low-credit counterparts who borrowed from savings banks and credit card firms among higher-interest charging lenders. More problematic is the blanket move granting the cash assistance irrespective of recipients’ income levels, a serious cause for concern over moral hazard.

Equally troubling is the measure setting an unsustainable precedent whereby commercial lenders are essentially extorted to provide aid packages at the expense of compromising fiduciary duty to bolster shareholder returns.

Experts say foreign investors will consider the development a major risk to their investment outlook, with shareholders taking the full brunt of the government-amplified uncertainty in the form of low valuation of and dividends from their stocks.

The package was announced during a meeting presided over by Financial Services Commission Chairman (FSC) Kim Joo-hyun and Financial Supervisory Service (FSS) Governor Lee Bok-hyun.

Strong-arming?

“It is strong-arming justified by public frustration,” an industry official said on condition of anonymity.

The country’s commercial lenders have registered record-breaking net incomes over the past few years, as underpinned by rapid monetary tightening from years of expansionary monetary policy that stayed in place to offset economic shocks from the COVID-19 pandemic.

Financial Supervisory Service (FSS) data showed the local banks’ net interest income averaged 42.5 trillion won between 2018 and 2022. The figure for the first six months of this year came to 28.5 trillion won.

The country’s top five banks’ net interest income stood at 36.2 trillion won last year, up 36 percent from two years ago. Their employee salary averaged over 110 million won last year, up 11.8 percent from two years ago.

Notwithstanding the hefty profits, the official said, Korea should be governed by market-oriented principles.

“True, the interest burden spiked over the past few years, straining financial conditions of many. But demonizing banks to make them seem the root of every evil is not the way to do it," he said.

After all, banks are out there to make money like everybody else. Profits made in the process are given back to shareholders, he added.

“Foreign investors have bought financial group shares expecting higher returns. If forced social contribution of this sort occurs, they will seek a source of investment elsewhere.”

Korea Federation of Banks Chairman Cho Yong-byoung said the assistance will be provided at the earliest possible date.

Kim and Lee said they appreciated the banks’ efforts to share the burden facing many small businesses.