South Korean banks' SME lending still heavily collateral-dependent, defying 'productive finance' policy

Despite the government's push for "productive finance" that encourages lending based on a company's future growth potential, major South Korean banks continue to heavily rely on collateral and guarantees for small and medium-sized enterprise (SME) loans. Out of approximately 42.6 trillion won (about $30 billion) in SME loans disbursed or committed under the "productive finance" initiative by the end of June, a significant 78.5%, or 33.5 trillion won, were secured by collateral or guarantees.

Collateral-based loans accounted for 60.3% (25.7 trillion won), while loans based on guarantees from various institutions made up 18.2% (7.7 trillion won). This leaves only 21.5% (9.1 trillion won) of SME loans as unsecured credit or other forms of lending. Data from the five major banks, KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup, reveals that each bank's reliance on collateral and guarantees for SME loans exceeds 70%, with some reaching as high as 85.4%.

“

The government is asking banks to move away from their traditional collateral- and guarantee-focused operations to expand productive finance, but the reality on the ground has not changed much. Funding is not being properly supplied to SMEs that lack collateral or sufficient financial transaction history, so the purpose of productive finance is not being fully realized.

In stark contrast, lending to large corporations shows a different pattern. For large enterprises, collateral and guarantee-based loans represented only 23.5% of the total 30.6 trillion won lent by the same five banks during the same period. Specifically, collateral loans were 20.3% and guarantee loans were 3.2%. Unsecured credit loans constituted a much larger portion, making up 76.5% of all loans to large corporations.

Experts criticize this disparity, arguing that banks' operational practices have not significantly changed despite government policy directives. Kim Jin-wook, a senior researcher at the Nara Sarim Institute, pointed out that SMEs lacking sufficient collateral or credit history are not receiving adequate funding, undermining the goals of productive finance. A bank official acknowledged the need for some collateral to ensure sustainable support and manage risk, but the data suggests a persistent preference for secured lending, particularly for smaller businesses.

“

There are cases where minimal collateral is needed along with sound risk management for sustainable support.