A study found that the Bank of Korea (BOK)'s Bank Intermediated Lending Support (BOK lending support) program, which lends funds to small and midsize businesses at low interest rates, boosts private investment and contributes to growth in gross domestic product (GDP).
Lee Dong-jin, policy adviser to the vice minister for the economy and a professor at Sangmyung University, said at a monetary policy conference held at the BOK headquarters in Jung-gu, Seoul, on the 15th, "BOK lending support appears to serve a function of managing market liquidity by changing the size of banks' lending, beyond supporting small and midsize businesses," and stated accordingly.
BOK lending support is a program created by the Bank of Korea (BOK) to supply funds to small and midsize businesses at low interest rates. When commercial banks extend loans to small and midsize businesses, the BOK lends funds to those banks at low rates. The rate is generally set below the base rate, and banks are currently borrowing at an annual rate of 1.0%.
Analyzing data from the first quarter of 2008 to the first quarter of last year for 16 banks handling BOK lending support, Lee estimated that when the BOK lending support limit increases, the total volume of loans to corporations and overall credit both rise.
Lee said, "No crowding-out (decline) was found in loans to large corporations or household loans when the BOK lending support limit was expanded, and the effect of increasing the BOK lending support limit was larger during periods when liquidity was being expanded through cuts to the base rate."
He added, "Based on the estimates, a model-based analysis of macroeconomic effects found that expanding the BOK lending support limit increased GDP by boosting private investment."
In particular, Lee said, "While interest rate policy affects both consumption and investment channels, BOK lending support was found to improve the real economy mainly through the investment channel by improving corporations' financing conditions," adding, "This suggests that BOK lending support can function not only to support small and midsize business loans or to ease credit allocation constraints, but also as a currency policy tool that complements interest rate policy."
Lee stated, "Because the transmission channel of the BOK lending support policy to the real economy differs from that of interest rate policy, combining it with appropriate interest rate policy tailored to economic conditions could improve the efficiency of currency policy."