Bank of Korea to expand SME lending limits based on net loan growth

The Bank of Korea is overhauling its financial intermediary lending support program to strengthen funding for small and medium-sized enterprises outside the Greater Seoul area.

The Bank of Korea's Monetary Policy Board voted Thursday to revamp the financial intermediary lending support program — expanding its function as a monetary policy tool and bolstering support for regional small and medium-sized enterprises (SMEs) — and amended the bank's regulations on loans to financial institutions accordingly.

The financial intermediary lending support program is a policy tool through which the Bank of Korea supplies funds to financial institutions at low interest rates to help SMEs that face relatively difficult financing conditions. It was introduced to complement the transmission of interest rate policy through the credit channel and to support price and financial stability.

As a first step, the Bank of Korea will introduce a new "SME credit-linked support" program in the second half of next year. The program targets SMEs broadly and is designed to adjust lending limits and interest rates flexibly in response to changing economic conditions. Eligible loans will cover all SME lending, with limits allocated quarterly based on the net increase in each bank's SME loan balance. To enhance policy effectiveness, the bank plans to offer incentives — including expanded limit allocations and preferential lending rates — tied to performance evaluations of individual financial institutions. It is also considering adding internet-only banks alongside existing banks to the list of participating institutions to promote competition among lenders.

The "regional SME support" program is also set for a budget increase in the first half of next year. The expansion aims to strengthen support for SMEs located outside the Greater Seoul area, which have relatively limited access to financing and are more vulnerable to shifts in economic conditions. Despite growth in regional economies, the program's cap has been fixed at 5.9 trillion won ($4.03 billion) since 2014. The regional allocation of program limits will going forward be determined by comprehensively weighing financial and economic conditions in each area.

Programs that have been run on a long-term, fixed basis for specific sectors — including trade finance support and new-growth and job-creation support — will be scaled back or discontinued from next year onward. The Bank of Korea said these programs had been operated on a standing basis to support credit supply in their respective sectors, but in doing so had constrained the flexible operation of the financial intermediary lending support program in response to economic conditions. It added that the availability of similar support through other policy finance institutions was also taken into account. The programs will be gradually scaled back and adjusted on a program-by-program basis, with consideration given to the impact on existing loans.

"Going forward, the financial intermediary lending support program will maintain a total ceiling of 30 trillion won and continue to support SMEs, while pursuing a phased overhaul that takes into account consistency with the overall monetary policy stance," the Bank of Korea said.