BOK to slash loan pool for small businesses

The Bank of Korea yesterday confirmed earlier news reports that it would reduce the pool of money allotted to commercial banks for small business investment. The move is seen by analysts as a tactic in an attempt to stem the surge in borrowing and soaring property prices, which have reached their highest levels in almost two decades. The move also marks the first time that the central bank has adjusted the loan pool for small businesses in four years.

The monetary policymaker lowered the ceiling on loans provided to commercial banks by 1.6 trillion won ($1.7 billion) to 8 trillion won beginning next year.

Many believe the move is part of the central bank's efforts to absorb excessive liquidity. The government and financial regulators undertook a spate of policy measures in recent weeks to limit the ability of banks to extend loans to companies and households.

The BOK officials, however, said that although the additional step would have some consequences for market liquidity, it is not their intended purpose.

Lee Ju-yeol, head of the central bank's monetary policy department said that cutting the lending limit is not a policy tool for controlling liquidity but it certainly should help in curbing it. "The impact of the measures on the market will depend on how we conduct open market operations," Lee said.

Open market operations are the means of implementing monetary policy by which a central bank controls the money supply by buying and selling government securities and other instruments.

Lee emphasized that yesterday's decision to cut the loan ceiling for commercial banks by 1.6 trillion won was an inevitable step to back policy measures already taken by the central bank to revamp its aggregate credit ceiling loan scheme.

The central bank offers aggregate loans to banks at a special interest rate of 2.75 percent to spur lending to smaller enterprises. Lee said a BOK move to eventually abolish the system and lower the ceiling is part of the process.

In November, the BOK ordered lenders to increase reserves against their deposits. The central bank later raised the ratio of reserves held against short-term foreign currency deposits. The unexpected move sent market participants clear signals that the central bank had joined the government and financial authorities' efforts to clamp down on the property market.

On the same day, the financial watchdog said it would request banks to set aside more reserves against possible loan losses, starting next year.

With the stricter provisioning policy, banks will have to accumulate additional loan-loss reserves of around 2.5 trillion won next year, the Financial Supervisory Service said.

Under the new rules, the minimum provisioning ratio for household loans classified as "normal" will be raised to 1 percent from the current 0.75 percent, the FSS ruled. The comparable ratio for loans classified as "precautionary" will be increased to 10 percent from 8 percent.

The financial regulator also ruled that banks will be required to set aside reserves equivalent to 1.5 percent of corporate loans classified as "normal," compared with the current 1 percent.

(jungmin@heraldm.com)

By Kim Jung-min