Financial Authorities Hesitant on Easing Corporate Loan Burden, Citing Basel III Rules

Financial authorities are sticking to their stance that it is difficult to lower the risk weights (RW) for corporate loans, citing current international Basel III regulations. This means companies may have to prepare higher capital when taking out loans.

The financial sector is raising the need to ease corporate loan RW as lending is increasingly concentrated on corporations due to household loan restrictions, expansion of productive financing, and ultra-low interest loans. Currently, the RW for corporate loans in the financial sector ranges from 50% to 150%, up to seven times higher than that for mortgage loans (20%). Financial institutions have been requesting a reduction in RW for loans to growing SMEs, including those in manufacturing.

With financial authorities finding it difficult to directly adjust corporate loan RW, a differentiated approach based on banks' own credit assessment systems (internal ratings-based approach) is being proposed as an alternative. This method suggests that instead of financial authorities directly adjusting the risk weights (RW), banks would differentiate RWs on a per-company basis. This would require the development of objective criteria to persuade financial authorities. Companies could be classified based on similar growth potential or probability of default. Clear standards that can gain external consensus are needed.

The Korea Institute of Finance stated that utilizing the internal ratings-based approach could provide room for adjusting risk weights (RW). Suggestions have been made for incentive measures at the government level, such as adding items reflecting productive financing as performance metrics in financial condition assessments. The five major financial holding companies pledged a total of 508 trillion won for productive and inclusive finance last year. KB Financial Group and Shinhan Financial invested 110 trillion won each, NH Investment & Securities 108 trillion won, Hana Financial 100 trillion won, and Woori Financial 80 trillion won. Of this amount, 87% (441 trillion won) is slated for productive financing, with most of this sum to be disbursed as corporate loans.