The Bank of Korea's low-interest loan program for small and medium-sized enterprises, introduced temporarily at the beginning of last year with a scale of 9 trillion won, is approaching its end this month. Amid ongoing economic slowdown, the financial sector is raising the necessity for the extension of support. The Bank of Korea is reviewing measures to restructure the overall financial intermediation support loan system, including support for corporations.
According to the Bank of Korea and others on the 23rd, the Monetary Policy Committee will decide whether to extend the special support program for small and medium-sized enterprises, one of the temporary programs of the Monetary Policy Committee, at the meeting on the 24th regarding non-monetary policy directions. The Monetary Policy Committee is a system where if individual banks lend money to small and medium-sized enterprises at ultra-low interest rates (1.0% per annum), the Bank of Korea mobilizes its issuance power to provide funds to those banks retroactively.
The Monetary Policy Committee first introduced a special support program to assist small and medium-sized enterprises facing financial difficulties in January last year. The total support scale is 14 trillion won, and the target is low-credit small and medium-sized enterprises in Seoul and local areas. Initially planned at 9 trillion won, it grew to a total of 14 trillion won after one extension and additional funding acquisition. Of this, 9 trillion won is set to expire at the end of this month, and the remaining 5 trillion won will mature on January 31 next year.
Concerns are arising in the market that if existing low-interest support benefits are lost amid sluggish domestic consumption, the financial burden on vulnerable corporations will intensify further. According to the Bank of Korea, the 5 trillion won program has a mechanical effect of reducing interest rates by 2 to 3 basis points (1 basis point = 0.01 percentage points). In other words, corporations receiving this benefit will face interest rates that are 2 to 3 basis points higher if the support program ends.
A source in the financial sector noted, "The Monetary Policy Committee is significantly helping alleviate the interest burden of small and medium-sized enterprises," adding, "If the program expires, the discount effect on interest will diminish and the increase in customers' interest burden will be inevitable, so an extension is necessary."
However, the need for reform to enhance the efficiency of the program's operation has also been raised. Currently, the Monetary Policy Committee is being operated through four permanent programs, including ▲ trade finance support (1.5 trillion won) ▲ support for new growth and job creation (8 trillion won) ▲ stabilization of small and medium-sized enterprise loans (300 billion won) ▲ support for local small and medium-sized enterprises (5.9 trillion won), and two temporary programs, such as special support for small and medium-sized enterprises. However, the support for new growth and job creation is limited to certain corporations, including startups within seven years and research and development-based startups, resulting in limited support effectiveness.
In this regard, the Bank of Korea is reportedly discussing plans to reduce the limits on support for new growth and job creation while increasing the unallocated reserve limit. This is an initiative to support vulnerable corporations through reserves in a situation where it is difficult to lower interest rates.
Governor Yi Chang-yong stated on the 10th, after the Monetary Policy Committee meeting, "We need to lower interest rates due to growth, but if it becomes difficult to lower because of real estate prices, we must use the Monetary Policy Committee, yet now we have exhausted the Monetary Policy Committee and cannot use it anymore. We are researching measures internally."
Governor Yi specifically said, "The Monetary Policy Committee includes projects that should be undertaken with fiscal measures, such as supporting new growth industries," and added, "I believe it is desirable to use the Monetary Policy Committee as a complementary tool to interest rate policy, and we need to change the system and also organize the excess amounts."
In this regard, a Bank of Korea official explained, "The central bank's monetary policy fundamentally affects the overall economy, not just specific areas," and noted, "Since we are using the Monetary Policy Committee as one of the monetary policy tools, it would be better for the loan policy to move in that direction." The official added, "We plan to review from a medium to long-term perspective what would be preferable for reform by looking at overseas cases."